BoC Hikes Rate By 0.5%, Canadian Dollar Yawns

06/01/2022

1 minute read

2022.06.01 19:16

The Canadian dollar is almost unchanged in Wednesday trading. The loonie has reeled off five consecutive winning sessions and is trading at a five-week high.

BoC Delivers 50-bps Hike

As expected, the Bank of Canada raised the benchmark rate 50-bps at today’s meeting, bringing the rate to 1.5%. This marked a second straight 50-bps hike, as the BoC continues to aggressively tighten policy in order to curb soaring inflation. CPI has ballooned to 6.8%, its highest level in 30 years.

The Bank of Canada has targeted inflation with front-loading force, with markets expecting one more 50-bps salvo before the BoC slows down the pace of tightening. The plan is to continue to raise rates three or four times in 25-bps increments, which would bring rates to around 3%, which is considered the neutral rate.

The kicker in this carefully laid-out plan is, of course, how inflation will behave. If inflation doesn’t begin to ease and there is no sign of an inflation peak, the central bank may have to hold the course with further 50-bps moves. There is also the spectre of inflation actually getting worse, which would lead to calls to resort to the heavy ammunition, in the form of a massive 75-bps increase.

The BoC is well aware that its credibility is on the line in its titanic battle with inflation. If the bank is viewed as not doing enough, inflation expectations could become unanchored and move higher, which is a nightmarish scenario for BoC policy-makers.

Canada’s GDP climbed in March by 0.7% MoM, higher than expectations. This marked a 10th straight monthly expansion. However, on an annualized basis, first-quarter growth fell to 3.1%, down sharply from 6.6% in Q4 and below the forecast of 5.4%. Exports were down, as the chilly global economic picture has hurt demand for Canadian exports.

USD/CAD Technical