‘Shock and awe’ is a military tactic where overwhelming force is employed to destroy an enemy’s will to fight. Today the Bank of Canada (BoC) deployed the central bank version by delivering a surprise 100bps rate hike. The last time the BoC moved by this amount was in 1998.
With the public’s perception of medium-term inflation climbing above 3%, the BoC is taking dramatic steps to remind Canadians that the Bank will do everything in its power to keep inflation within a 1% to 3% band.
The key points from today’s meeting:
- The objective of moving rates is to get inflation back to target (2%) while achieving a soft landing
- The BoC expects to move rates to slightly above 3% quickly (the market is priced for 3.5% by year-end)
- They do not expect inflation pressures to abate until later in the fall (basically we can ignore July and August CPI data)
- The path of inflation in 2023 will determine whether the BoC needs to hike, hold steady or ease next year
Market implication:
- The bond market is already priced for 3.5% overnight rates so yields beyond 5 years are broadly unchanged
- Yields could trade within the recent range (3.0-3.5%) until the fall when CPI data will once again become important
