As expected, the Bank of Canada (BoC) on Wednesday announced a 75 basis points rate hike to 3.25%, the highest level since 2008. Analysts at CIBC, point out the central bank appears ready to sacrifice more growth than what they expected to get inflation falling on a faster trajectory.
“The 75 bp hike to an overnight rate of 3.25% was widely expected, but we took note that the final paragraph opted to retain the view that “interest rates will need to rise further.” We’ll therefore be lifting our target for the end of this tightening cycle, with another 25-50 bps on tap for October.”
“The BoC appears ready to sacrifice more growth than we expected to get inflation falling on a faster trajectory, and we'll be bumping down our GDP projections for Canada in an updated forecast to be released next week. While the Bank could opt for as little as an extra quarter point, had they been convinced that 3.5% was the ceiling, they could have done that move today, so we'll have to give some thought to whether they're thinking of a 3.75% rate. That would be a half point above what we had built into our prior GDP call, and therefore somewhat material to the outlook.”
“The fact that the Fed is also talking fairly tough these days, and might also be leaning to hike a bit more than we had projected, dulls the benefits to the loonie of a more hawkish Bank of Canada. We still judge it as unlikely that the peak overnight rate in Canada will end up exceeding that of the US.”