Bank of Canada Starts Hiking Rates, Signalling More To Come
The Bank of Canada is going to keep raising their overnight interest rate levels as they become more confident in the Canadian economy. Hikes are expected from time to time, but not this soon after the last one! This is the first increase in 2019. The Bank indicated it was continuing its reinvestment phase, which keeps its overall government bond holdings on its balance sheet constant.
What makes Bank of Canada to take this decision?
The Bank’s press release highlighted the major new source of uncertainty provided by the unprovoked invasion of Ukraine by Russia and suggested it is a new source of substantial inflation pressure. Prices for oil, metals, wheat and other grains have skyrocketed recently. Moreover, this geopolitical distention negatively impacts confidence worldwide and adds new supply disruptions that dampen growth. “Financial market volatility has increased. The situation remains fluid, and we are following events closely .”
The Bank also commented that economies have emerged from the impact of the Omicron variant more quickly than expected. Demand is robust, particularly in the US.
“Canada’s economy is doing better than expected. Economic growth in Canada was an estimated 6.7 percent in the fourth quarter of 2013, surpassing the Bank of Canada’s projection and continuing an upward trend that began one year ago. Exports and imports increased over the same period, since demand for Canadian goods has remained strong despite growing economic uncertainty around the world. The Bank of Canada has actually raised their forecast from four to six percent, saying that its previous pessimistic outlook was ‘too low’ after all.”
The Bank of Canada keeps its interest rate unchanged as expected, even though CPI inflation has gone up. Price increases are quite pervasive and core measures have also risen but remain below the 2% target. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices through both material outlays for food and energy. As a result, the central bank estimates that inflation will be higher in the future than it previously projected in January. Persistently elevated inflation increases the risk that long-run expectations could rise out of sync with current policy goals. The central bank intends to use its monetary policy tools to put a lid on expectations above 2%.
The Bank of Canada will be carefully monitoring economic developments and advances in the inflation picture before making future adjustments to the policy rate. In particular, higher interest rates will likely be required if the economy continues to grow and inflation remains on target, Bank Governor Stephen S. Poloz said today after the announcement by Canada’s central bank that it is raising its overnight rate target a quarter point to 1 per cent.
Canada interest rate hike outlook
The Bank of Canada has made a clear statement regarding the outlook for a normalization of interest rates, which we consider to mean the next meeting on April 13. We expect a series of rate hikes over the next year and another 25 basis point increase following this next meeting. The increased uncertainty and volatility arising from the war in Ukraine is front of mind worldwide, but it will not deter central banks from tightening monetary policy to forestall an embedded rise in inflation expectations which are expected to rise as oil prices stabilize with an improving demand outlook.
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