Notes from the Desk: The Bank of Canada Rate Announcement- Surprised But Not Surprised
Today’s announcement.
The Bank of Canada (BoC) raised the overnight rate by 25 bps to 4.75% this morning. The move was not a total surprise, as bond traders had the odds of a hike at around 40%.
After the announcement yields moved ~20 bps higher as investors (and several economists) shift to incorporate another 25 bps hike in July.
Looking ahead.
The BoC pointed to the ‘stickiness’ of core inflation and the persistence of excess demand (a new worry) as their motivation for today’s hike. This is a clear indication that they are worried about inflation expectations becoming entrenched above 3%. On the other hand, they replaced the language about being prepared to hike again if needed, by saying they will assess all the data between meetings.
Taking both factors into account, we expect the BoC to be very data-dependent, which means more rate volatility as the market responds to incoming economic numbers.
