Instant view: Bank of Canada surprises with smaller-than-expected interest rate increase

TORONTO (Reuters) – The Bank of Canada announced a smaller-than-expected 50-basis point rate hike on Wednesday and said future increases would be influenced by its assessment of how tighter policy was working to slow demand and ease inflation.

The central bank, in a regular decision, increased its policy rate to 3.75% from 3.25% and has now lifted rates by 350-bp since March. Economists and money markets were betting on a 75-bp move ahead of the decision.

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COMMENTS

STEPHEN BROWN, SENIOR CANADA ECONOMIST, CAPITAL ECONOMICS

“Today’s…interest rate hike…suggests that the Bank of Canada is growing confident that its actions so far will be enough to vanquish inflation although, by doing less than markets were pricing in, the Bank risks sending too dovish a message that it will eventually have to reverse.”

“After spending the last two months telling us that the only thing that matters for the policy outlook is core inflation, inflation expectations and the tightness of the labour market, the Bank dropped down to a 50 bp hike today – despite elevated core inflation, inflation expectations and the tightness of the labour market. That came as a surprise to forecasters, with the consensus shifting up to a 75 bp hike following the strong core CPI data last week. It is hard to see much justification for the slower pace of tightening in the Bank’s new forecasts either.”

“While the Bank slowed the pace of its tightening, it reiterated that it still judges that ‘the policy interest rate will need to rise further’…At the very least, that means there is one final interest rate hike ahead, of 25 bp, to take the policy rate to 4.00% although, given the stickiness of core inflation, the terminal rate may still end up a little higher than that.”

JIMMY JEAN, CHIEF ECONOMIST, DESJARDINS GROUP

“It’s surprising to see the Bank of Canada going against market and consensus expectations on the dovish side. It’s just that – given their tendency so far to kind of not challenge what the market was pricing – that’s why we thought they would go ahead with 75 (basis points). But I think it says that they’re now moving to that place where they’re going to acknowledge the impact that they’re already seeing. That’s very prominent in that statement. And I think that’s a welcome development in terms of not having that dogmatic approach of 75 basis points every meeting, but kind of taking proper measure of the response.”

“They still say that they’re going to continue to hike. But could it be 50 basis points? Or could it be another step down to 25 basis points? Certainly, that’s in the realm of possibility and is going to obviously depend on the data. But I think, at the same time, they’re recognizing… that they have to be careful at this point… We have several indicators suggesting that we’re playing with fire if we think we can follow the Fed all the way up to 5% or so.”

“In the past, they have contended that the soft landing was likely. I think Macklem kind of stepped away from that, arguing that the path was getting narrower… There will be a recession. That’s our forecast. But there’s a lot of uncertainty around that. So I think the their new forecast does better justice to that kind of uncertainty. But regardless of this, slowing growth or recession, we know that things are going to be deteriorating from now on as a result of those rate hikes. Hence, a reason to start slowing down and also having trust in the fact that those rate hikes will produce the lower rate of inflation that is desired.”

MICHAEL GREENBERG, SVP, PORTFOLIO MANAGER, FRANKLIN TEMPLETON INVESTMENT SOLUTIONS

“It was a bit of a surprise … maybe the urgency that would have been communicated by a 75-basis-point hike is less but the destination is pretty clear. They still think they have an inflation problem, they are still quite concerned about inflation expectations becoming entrenched and therefore are pretty keen to get back to more neutral interest rate levels.”

“There are still probably more rate hikes to come, it just seems like the concerns around the economic fallout and the financial stability fallout of raising rates so aggressively is maybe starting to weigh on them a little bit and hence they took their foot off the brakes just a little bit.”

DOUG PORTER, CHIEF ECONOMIST, BMO CAPITAL MARKETS

“It’s a mild surprise, but I wouldn’t say it’s a shock. I think it was a close call between 50 and 75 (bps rate hike). Clearly, the Bank of Canada believes it’s getting close to the so called terminal rate and I think they wanted to leave a few more options open.”

“They’re probably also guided somewhat by the slowdown that we’re seeing in employment, in home sales, in retail sales and then manufacturing sales. So I think the fact that they also warned that rates will still rise further, takes a little bit of an edge off the slightly smaller than expected hike.”

“I don’t think this changes the bigger picture. We’d still be comfortable with looking for the bank still hiking interest rates ultimately to a bit above 4%.”

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