As widely expected, the Bank of Canada raised the overnight rate to 0.5%. It also stated that it will continue the reinvestment phase of its balance sheet by maintaining its holdings of Government of Canada bonds.
On the economic outlook, the Bank noted that “economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed.”
On inflation, it stated that “inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards.”
Regarding the impact of geopolitical risks, the BoC stated, “the unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased.”
Key Implications
It finally happened. The BoC has lifted its policy rate, likely setting in motion a series of interest rate hikes over the next several months. With employment likely to show a strong rebound next week and inflation continuing to ratchet higher, the need for higher rates is self-evident. See our recent Dollars & Sense for more details on the outlook for rates.
The Bank of Canada’s policy path isn’t set in stone. The Russia/Ukraine conflict is causing financial conditions to tighten. Should the spillover become more entrenched, further tightening may need to be reassessed.
Financial markets are improving today, with North American equity markets rebounding and yields rising. The Canada 2-year and 10-year yields are up 7 basis points and 4 basis points, to 1.4% and 1.75%, respectively. With the BoC confirming the likelihood of further rate hikes, the loonie is appreciating towards 79 U.S. cents.
