- The BoC raised its overnight rate by 25bps...
- ...as a minority including Scotia Economics expected
- The bias leaves the door open to doing more...
- ...and tentatively favours another 25bps in July
The Bank of Canada hiked its overnight rate by 25bps to 4.75% as forecast by Scotia Economics. This was a surprise to markets and so the Canada two-year yield jumped by 21bps post-statement while the C$ appreciated by half a penny at first before reining in some of that reaction because the BoC decision hit US short-term rates. The US two-year yield jumped by 7bps while raising the probability of another Fed hike on the logic that multiple central banks are not done yet. July is priced for another 25bps BoC hike.
Markets had gone up to the 10amET statement pricing less than 50% odds of a hike and only 8 out of the rather generously defined consensus pool of 37 forecasters anticipated the hike. Scotia Economics led all of this consensus with guidance that the front-end was overly dear back in March and April and for months has guided toward renewed hike risk into the summer months. Go Team Scotia, and kudos to the competition for strengthening the quality of the debate with views from all sides. I think the BoC did the right thing and hats off to the Governor and Governing Council for doing what’s necessary.
But where to from here? My reading of the statement leaves the door open to doing another 25bps in July, but it’s going to be a data dependent call. Today’s hike gives them more optionality to decide what to do before going on vacation in August. In coming to this view, the following remarks in the statement are worth emphasizing.
- “....monetary policy was not sufficiently restrictive...”
- “...underlying inflation remains stubbornly high.”
- “Overall, excess demand in the economy looks to be more persistent than anticipated.”
- “….prices for a broad range of goods and services coming in higher than expected.”
- “…with three-month measures of core inflation running in the 3 ½ – 4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target.”
- they used “surprisingly” to describe strength in US & Canadian consumer spending.
- “Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target.”
“Stuck”? “Surprisingly”? These are frank words of admission that the BoC realizes it faces more upside risk to growth and inflation than previously judged. The final paragraph’s guidance certainly does not slam the door on further policy tightening. It keeps it wide open, depending upon the evolution of data and developments.
Please see the accompanying statement comparison. The next decision lands on July 12th with a full MPR and forecasts. Deputy Governor Beaudry will deliver tomorrow’s Economic Progress Report (3:10pmET) followed by a press conference (4:45pmET). The Summary of Deliberations will be published on June 21st. What the BoC also accomplished with a hike today is to disprove the flawed notion that only the Governor can deliver their decisions and that’s a very good thing for Governing Council’s credibility.
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