The Bank of Canada hiked by 75 bps to 3.25% as expected on Wednesday this week and is still assessing how much further rates will need to go in order to return inflation to target.

The BoC on inflation

The Bank of Canada recognises that policy rates will still need to rise further. The Governing Council remains resolute in trying to achieve the 2% inflation target. The current level of inflation in Canada is 7.6% and that is down from 8.1% due to a fall in oil prices. However, core inflation remains high in the 5-5.5% band.

Domestic growth

The BoC noted that GDP grew by 3.3% in Q2 which was weaker than projected. However, domestic demand was very strong. Consumption grew by 9.15% and business investment was up near to 12% The housing market is cooling, as anticipated with higher mortgage rates, and down from the ‘unsustainable levels’ during the pandemic. The domestic labour market is tight, but the BoC does expect the economy to moderate in the second half of the year.

One step at a time

In a similar vein to the Fed and the RBA, the BoC will assess how much higher rates will need to go as the impact of tighter monetary policy works its way through the economy. Next meeting is on October 26, 2022. You can read the full BoC statement here.

The takeaway

There was no surprise here and nothing to obviously trade. One thing to note is that the BoC was less concerned about both domestic and international inflation. You can read that when you compare the statement here with the prior statement.

The thing to look out for is if the BoC reduces the neutral rate. This could see some of the recent CAD strength unwind. You can see the continued march of CAD strength and there was nothing in the latest BoC statement that was a massive surprise. As a result, there is no obvious trade outlook here aside from looking at short-term CAD catalysts. If anything, less concern over inflation could result in some CAD pullbacks, but it is a low conviction perspective.