EconoFACTS

June 07, 2023 | 10:39

BoC Policy Announcement — 25 bp Hike and Not Done Yet

Economist

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

Benjamin Reitzes

Managing Director, Canadian Rates & Macro Strategist
Fixed Income Strategy

Benjamin has been with the Bank of Montreal for over a decade. He is responsible for the Canadian macro-economic... (Read more)

The Bank of Canada raised its policy rate 25 bps to 4.75%, with the market about 50/50 heading into the meeting. The tone of the statement was pretty hawkish, which is not a surprise given the recent data flow.

On the economy, the Bank notes that Q1 GDP was better than expected, even after accounting for population growth. The strength of demand for interest-sensitive goods was highlighted. Housing was specifically cited as an area of strength, and we're likely to see more evidence of the rebound in sales and prices when we get May's data next week. The tightness of the labour market was mentioned as well, as hiring keeps pace with the higher immigration and strong participation rates. That all culminates in the BoC believing that, "Overall, excess demand in the economy looks to be more persistent than anticipated."

On inflation, while the headline rate is still expected to hit 3% this summer, the focus is on core inflation which continues to make policymakers uncomfortable, as short-term metrics are running in the 3.5%-to-4% range. There's real concern that with more persistent excess demand, "CPI inflation could get stuck materially above the 2% target."

Given that backdrop the BoC decided that "monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target". Looking ahead to July, policymakers will continue to assess the incoming data on inflation (core and headline), excess demand, wage growth, and corporate pricing behaviour.

Key Takeaway: If the data remain firm over the coming few weeks, another 25 bp hike in July looks likely. We'll get more details on the decision from Deputy Governor Beaudry tomorrow when he delivers the Economic Progress Report.