Bank of Canada Hikes Rates 50 bps to Highest Level Since 2008

Bank of Canada raised the target for its overnight rate by 50bps to 4.25% in December 2022, the market had been pricing a 62% chance of a 25-bps hike while economists narrowly favored the 50-bps hike. The move follows the aggressive hikes at the last three meetings. It was the seventh consecutive rate hike pushing borrowing costs to the highest level since 2008. Notably the BoC Governing Council dropped “expects that the policy interest rate will need to rise further” to achieve the 2% inflation target from this month’s statement. There is no press conference scheduled for today.

Bank of Canada Building
  • The Bank of Canada today increased its target for the overnight rate to 4.25% with the Bank Rate at 4.50% and the deposit rate at 4.25%. The Bank is also continuing its policy of quantitative tightening.
Canada Interest Rate
 Bank of Canada overnight rate

There’s no press conference today but the BOC’s Kozicki speaks tomorrow at 12:45 pm ET

“Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate.” officials said in the policy statement.

Market Reaction

  • UPDATED US to the Canadian dollar USDCAD moved from 1.3644 to a low of 1.3587 before a bounce to 1.3651 over the following hours.

BoC Highlights

  • The overnight rate is now 3.25% Prior overnight rate was 3.75%
  • “Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target”
  • There is growing evidence that tighter monetary policy is restraining domestic demand
  • Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.
  • Prior statement said “the Governing Council expects that the policy interest rate will need to rise further” but this has been dropped
  • We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.
  • Inflation is still too high and short-term inflation expectations remain elevated
  • In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows

Bank of Canada Full Rate Statement for December 2022

The Bank of Canada today increased its target for the overnight rate to 4¼%, with the Bank Rate at 4½% and the deposit rate at 4¼%. The Bank is also continuing its policy of quantitative tightening.

Inflation around the world remains high and broadly based. Global economic growth is slowing, although it is proving more resilient than was expected at the time of the October Monetary Policy Report (MPR). In the United States, the economy is weakening but consumption continues to be solid and the labour market remains overheated. The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events.

In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.

CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases. Measures of core inflation remain around 5%. Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum. However, inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.

Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.

Information note

The next scheduled date for announcing the overnight rate target is January 25, 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.

Bank of Canada’s Quarterly Monetary Policy Report (Oct 2022)

  • 2022 GDP seen at 3.3% vs 3.5% prior
  • 2023 GDP seen at 0.9% vs 1.8% prior
  • 2024 GDP seen at 2.0% vs 2.4% prior
  • 2022 CPI seen at 6.9% vs 7.2% prior
  • 2023 CPI seen at 4.1% vs 4.6% prior
  • 2024 CPI seen at 2.2% vs 2.3% prior
  • Output gap in Q3 shrank to between 0.25% and 1.25% from 0.50% and 1.50% in Q2
  • Slowdown in economic activity abroad, especially in the United States, is starting to weigh on exports thought recent CAD depreciation partially offsets this
  • High energy costs seem to have passed through to inflation much more than usually, it will take time for these impacts to recede
  • Global growth seen at 1.6% in 2023
  • Bank views around inflation outlook as roughly balanced, but upside risk is of greater concern due to persistently high inflation
  • Inflation seen returning to 2% target around end of 2024
  • A couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth

Source: Bank of Canada

From the TradersCommunity News Desk