Canada’s Central Bank Turns Tough on Inflation
Canada’s Central Bank Turns Tough on Inflation
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:
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.
About: HYCM is the global brand name of HYCM Capital Markets (UK) Limited, HYCM (Europe) Ltd, HYCM Capital Markets (DIFC) Ltd and HYCM Limited, all individual entities under HYCM Capital Markets Group, a global corporation operating in Asia, Europe, and the Middle East.
High-Risk Investment Warning: Contracts for Difference (‘CFDs’) are complex financial products that are traded on margin. Trading CFDs carries a high degree of risk. It is possible to lose all your capital. These products may not be suitable for everyone and you should ensure that you understand the risks involved. Seek independent expert advice if necessary and speculate only with funds that you can afford to lose. Please think carefully whether such trading suits you, taking into consideration all the relevant circumstances as well as your personal resources. We do not recommend clients posting their entire account balance to meet margin requirements. Clients can minimise their level of exposure by requesting a change in leverage limit. For more information please refer to HYCM’s Risk Disclosure.
20220607
