EconoFACTS

September 07, 2022 | 10:40

Bank of Canada Rate Decision — TIFF Back in Town

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 hiked rates 75 bps to 3.25%, as broadly expected. That brings the cumulative tightening so far this year to 300 bps, the fastest pace since the mid-1990s. The Bank remains among the global leaders in the fight against inflation, with policy rates now sitting nearly 100 bps above fed funds, with the Fed poised to lift rates again later this month.

The policy statement remained very much focused on inflation. Despite the pullback in CPI inflation in July (and a likely further deceleration in August), the Bank's unease has not let up one bit. In fact, the statement notes that the "data indicate a further broadening of price pressures, particularly in services", while core inflation "continued to move up". Services inflation tends to be domestically driven, and that's exactly where the BoC believes it can have an impact through rate hikes. On the economy, despite the below-expected Q2 GDP report, the economy "continues to operate in excess demand and labour markets remain tight." The Bank still expects growth to slow in H2, with tighter policy having an impact. Indeed, policymakers want to see a few quarters of below-potential growth and some loosening of labour market conditions before they'll be more comfortable with the inflation outlook.

The concluding paragraph says that the Governing Council "judges that the policy interest rate will need to rise further." And, they'll be "assessing how much higher interest rates need to go". That leaves little doubt that further rate hikes are coming; the only question is how big will the next move be? The door is wide open to allow the data to guide the next decision, but at this point, the tone of the statement remains very concerned about inflation.

Bottom Line: We're penciling in a 50 bp rate hike for the October policy meeting, and will let the data flow over the next seven weeks sway that call either higher or lower depending on the strength/weakness in inflation and growth.