Canada’s first interest rate hike in 5 months… Highest 4.75% in 22 years

The Bank of Canada (BoC) unexpectedly raised the benchmark interest rate to 4.75%, the highest level in 22 years. As inflation has not come down due to overheating of the economy, the voice of anticipation of an additional interest rate hike next month has grown louder.

◇ Concerns about continued excess demand… “Monetary policy is not constrained”

After the monetary policy meeting on the 7th (local time), the BoC raised the base rate by 25bp (1bp = 0.01%p) to 4.75%. Interest rates rose to their highest level in 22 years since May 2001. The market had expected an interest rate freeze.

The BoC has raised rates eight times since March of last year, to 4.5%, the highest in 15 years, the steepest tightening cycle in BoC history. Since then, the interest rate has been frozen since January of this year, but it rose again in June.

The BoC said in a statement that consumer spending was surprisingly strong, demand for services was rebounding and the labor market was tight, suggesting excess demand could be more persistent than expected.

Inflation rose to 4.4% in April for the first time in 10 months. Gross domestic product (GDP) rose 3.1 per cent in the first quarter, beating the BoC’s forecast of 2.3 per cent, while the economy grew 0.2 per cent in April.

In particular, inflation rose in April and core inflation remained high over the past three months, the BoC said.

“Concerns have grown that the consumer price index (CPI) may continue to exceed its 2% target,” the statement said.

The BoC judged that “monetary policy is not sufficiently cyclical to bring supply and demand back into balance and return inflation to the sustainable target of 2%.”

However, it deleted the wording in its previous policy statement from April that it was “ready to raise the policy rate further” to keep inflation on target, leaving it more open to its next possible move.

The BoC expects inflation to still slow to 3% this summer.

However, the BoC did not reiterate in its statement that inflation would slowly slide back to its target of 2% by the end of next year, as it did in April when its most recent forecast came out.

◇ The strong dollar since 4 weeks… 60% chance of further increase in July

The Canadian dollar strengthened to its highest level in four weeks on the BoC rate hike. In the futures market, the probability of another interest rate hike in July was reflected in the price at 60%, and the probability of another interest rate hike by September was reflected in the price at almost 100%.

Derek Holt, Scotiabank’s vice president of capital markets and economics, said, “We expect another 25 basis points to rise in July.”

Andrew Kelvin, chief Canadian strategist at TD Securities, expects another hike in July, saying the Canadian economy is showing remarkable resilience through 2023. “More tightening is needed to lower demand to meet the 2% inflation target,” he added.

Politicians were divided into conflicting opinions about a financial crisis and a soft landing. Pierre Poilièvre, leader of Canada’s main opposition Conservative Party, accused Liberal Prime Minister Justin Trudeau of fueling inflation through deficit spending and pushing Canada into a “full-blown financial crisis.”

But Treasury Secretary Christia Freeland said it was the COVID-19 pandemic and the Russian invasion of Ukraine that fueled inflation.

“No country is better positioned for a soft landing than Canada,” he said. “Tough times are passing and with low, stable inflation and strong, steady growth, a comeback is very close.”

(Seoul = News 1)