Going into the Bank of Canada meeting markets had priced in around an 80% chance of the BoC hiking interest rates. This had fallen from around 100% and was due to the uncertainty injected into markets by Russia’s ongoing conflict with Ukraine. In the event, the BoC did hike rates as expected and they also signalled that interest rates would need to rise further.

Economic slack absorbed: recovery is on track

Canada’s fourth-quarter GDP was at 6.7% and that was stronger than the Bank’s projection. The BoC said that this confirmed their view that economic slack was absorbed. Exports and imports both picked up and the BoC noted that demand is strong with their main trading partner the US. Employment took a dip in January and that was attributed to the Omicron variant.

Inflation is expected to rise higher

The BoC expect to see inflation rising more this year. Inflation is currently at 5.1% and is well above the bank’s target range. The BoC flagged the risk that inflation could spiral higher from here. Surging oil prices, higher transportation costs, and poor harvests, all put price pressures on the system. The BoC acknowledged that longer-run inflation expectations may drift higher.

Ending QE

The BoC said it will now consider when to end its reinvestment phase and that it would be allowing its holding of Government Canada bonds to begin to shrink. The start of the end of QE will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.

In summary

There was not a lot to take from the latest Bank of Canada meeting, but on balance, it is leaning more hawkishly. The main concern of the BoC seems to be that inflation does not run hot. The BoC stands prepared to act on rising inflation QT is the next step. In terms of trading, this should mean a sold CADJPY long bias has opened up with Japan likely to keep rates very low for the foreseeable future. You can read the full report here.