Holy Smokes, The Bank of Canada Means Business

by | Jun 8, 2023 | Uncategorized

After the Bank of Canada hit pause in February, even stating themselves that they felt we were done with increases, this was a complete sucker punch yesterday with an increase of 0.25%.

With a strong Labour Market and a Hot Housing Market, the thought now is that there could be a further increase this year. Listening to many Economists, there are some who feel we will have a rocky ride from now (Inflation at 4.40%) to get to their magical 2.00% next year and much talk is also about the Bank of Canada overstepping and sending us into recession rather than the “soft landing” they speak of and we may then see rates tumble.

One thing is for sure, nothing is known, nothing is certain. This is very much the Bank of Canada saying “Hey Canada, we see you” and looking to reduce our spending.

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The Bank of Canada surprised much of the market by hiking the overnight policy rate by 25 bps to 4.75%, driving up the prime rate and market rates as well.

If there were any doubt that the Bank of Canada wanted inflation to fall to 2%, it would be obliterated today. In a relatively surprising move, the Bank hiked the overnight policy rate by 25 bps to 4.75%, and an equivalent hike will follow in the prime rate. Fixed mortgage rates had already leaped higher even before today’s move as market-determined bond yields have risen in the wake of the US debt-ceiling debacle. Now variable mortgage rates will increase as well. The central bank is determined to eliminate the excess demand in the economy.

“Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,” the bank said, citing an “accumulation of evidence” that includes stronger-than-expected first-quarter output growth, an uptick in inflation and a rebound in housing-market activity.

I had thought that the Bank would want to see the May employment data and the next read on inflation before they resumed tightening, but with the substantial May numbers in the housing market, the Governing Council jumped the gun.

The Reserve Bank of Australia did the same thing earlier this week. But their economy was already softening. On the other hand, the Canadian economy grew by a whopping 3.1% in the first quarter and is likely to surprise on the upside in Q2, boosted by a strong rebound in housing. If the correction in housing is over, then the Bank has failed to cool the most interest-sensitive sector in the economy. Governing Council fears that inflation could get stuck at levels meaningfully above the 2% target.

Bottom Line

The next Bank of Canada decision date is a mere five weeks away. While we will see two labour force surveys and one inflation report, the odds favour another rate hike before yearend. The BoC concluded in their press release that, “Overall, excess demand in the economy looks to be more persistent than anticipated.”

No doubt, if the data remain strong over the next several weeks, another 25 bps rate hike is likely in July. Deputy Governor Beaudry will flesh out today’s decision in his Economic Progress Report tomorrow.

Dr. Sherry Cooper
Chief Economist, Dominion Lending Centres