June 01, 2022 | 10:45
Bank of Canada Rate Decision — Top Hawk
The Bank of Canada raised its policy rate 50 bps to 1.50% as widely anticipated. With inflation running at the fastest pace in decades and poised to accelerate further, the BoC has little choice but to aggressively push rates at least into neutral territory. That was clearly the message from the policy statement, as the BoC ramped up the hawkishness, noting that "the Governing Council is prepared to act more forcefully if needed." That phrase introduces the risk of a 75 bp hike at the next meeting in July, though such a drastic move would likely need to be accompanied by another unexpected acceleration in inflation.
Unsurprisingly, the major theme of the statement was inflation. The Bank outlined the forces driving prices higher, noting right at the top of the statement that inflation is well above its forecast and "likely to move even higher in the near term before beginning to ease." BMO is expecting inflation to accelerate to a 7-handle in May, as energy prices surged in the month. The statement also noted the breadth of inflation pressure, as "almost 70% of CPI categories now show inflation above 3%."
The BoC believes the global economic backdrop, particularly for Europe, has deteriorated due to the war in Ukraine and lockdowns in China. Those factors are also pushing inflation higher. However, the U.S. is viewed as "robust", despite the negative Q1 GDP print.
The statement was upbeat on the domestic economy, stating that it is "clearly operating in excess demand". Q1 GDP growth was bang on the BoC's forecast, while Q2 "is expected to be solid". The labour market remains strong amid elevated job vacancies, labour shortages and accelerating wage growth. There was a brief mention of moderating housing activity, but no sign that the Bank is at all concerned (nor should they be).
Key Takeaway: The Bank of Canada is focused on maintaining its credibility, and ensuring inflation expectations remain anchored. With inflation poised to rise above 7% in the next print, the risks to expectations are skewed to the upside as well. That was no doubt the driver behind the "more forcefully" language, with the economy running "in excess demand" reinforcing the need for aggressive policy. Don't expect the hawkish rhetoric to let up until inflation starts to trend lower. We continue to look for another 50 bp hike in July, but there's a risk of a 75 bp move if inflation surprises to the high side yet again.