BoC hikes by 50 bps and takes another hawkish tilt

At the prior central bank meeting, the Bank of Canada delivered a hawkish surprise. They did this to tackle rising inflation. Since that meeting inflation print came in high again and the BoC mentioned again in June’s meeting that inflation pressure is continuing to broaden. The problem that the BoC identified is that ‘pervasive’ input prices are feeding through into consumer prices. Around 70% of CPE categories now show inflation above 3% and the risk of entrenched inflation is noted. Interest rates were raised to 1.50%.

This led to a 50 bps hike as expected and a lift in forward guidance

The BoC hiked by 50bps, but that was 100% expected by short-term interest rate markets. However, the level of inflation has exceeded the BoC’s projections. The day after the decision deputy Governor Hawkesby has said that with inflation close to 7% it is well above their most recent forecast and is likely to move even higher. This leads to the BoC being ‘resolute’ in bringing inflation back down. At the moment the BoC consider that interest rates will need to rise to somewhere between 2-3% in order to bring inflation back down to their 2% target.

More than 50bps rate hikes coming?

BoC Deputy Governor Beaudry confirmed on June 02 that the BoC may have to use bigger moves than 50bps rate hikes and that he expects the policy rate will need to be raised to 3% or above to control ‘galloping inflation’. At the moment the short-term interest rate markets are now pricing in a 94% chance of a 50bps rate hike for July.

You can compare this statement with the prior one below:

See BoC’s statement here

Analysis for the CAD

This keeps the bullish pressure on the CAD and we saw CADJPY and CADCHF lift higher on this decision last week. However, it is hard to see this move worth chasing, and waiting for peak CAD bullishness seems a reasonable move as we head into the summer.