The Bank of Canada has front-loaded some of its interest rate hikes at the last BoC meeting in the middle of July hiking by a surprise 100bps. In June’s meeting, the BoC made a bullish twist as inflation pressure became more pronounced and the BoC stated that ‘pervasive’ input prices were making their way into the CPI data.
Inflation pressures run the risk of becoming costly to remedy
The BoC stated that, ‘More than half of the components that make up the CPI are now rising by more than 5%. With this broadening of price pressures, the Bank’s core measures of inflation have moved up to between 3.9% and 5.4%’. Inflation has crept up significantly since earlier in the year and the BoC now sees a real risk of a wage price spiral. The BoC’s exact words were that there is now an increased risk of elevated inflation becoming entrenched in ‘price and wage setting’. The BoC goes on to say that the economic impact of ‘restoring price stability’ will be higher if that happens.
The BoC’s actions explained
In simple terms, the BoC is trying to act quickly and curb inflation before a wage price spiral clearly takes effect. This is why it surprised economists and short-term interest rate markets with a 100 bps rate hike. At the end of the week of the July 13 meeting, Short Term Interest Rate markets increased expectations for even higher rates going forward with a rate of 3.64% for October 2022. See below that difference from the end of that week from the Financial Source Terminal.
This means that the CAD may find buyers on deep dips, but a lot of the expectations for higher interest rates may well be priced in. So, the best opportunity would most likely come from signs of falling inflation or indications the BoC is looking to be less aggressive in its rate hiking policy.