July 13, 2022 | 11:23
Bank of Canada Rate Decision & MPR — Desperately Playing Catch-Up
The Bank of Canada shocked with a 100 bp hike, the largest since 1998, bringing policy rates up to 2.50%, the mid-point of the Bank's neutral range. Inflation was the major theme in the statement, with the BoC now anticipating prices to rise at around an annual 8% pace in the next few months. While global pressures continue to drive inflation, the statement notes that "domestic price pressures from excess demand are becoming more prominent". Policymakers are concerned that inflation expectations are going to become unanchored if elevated inflation persists, driving the decision to "front-load the path to higher interest rates". And, they're not done yet, as the statement notes that "rates will need to rise further".
The discussion of the domestic economy was generally upbeat, with excess demand building further. Strong labour markets are driving wage pressures, while robust demand has allowed businesses to pass along cost increases. Despite the upbeat language, GDP growth forecasts were cut across the board, with Q2 trimmed two points to 4%. Annual GDP growth was cut to 3.5% for 2022 (from 4.2%) and 1.8% for 2023 (from 3.2%), with the risks to the 2023 call squarely on the downside given the sharp move higher in rates.
Back to inflation, the forecasts were raised sharply. With June's CPI print on deck next week, the BoC is looking for 7.6% in Q2, up 1.8 ppts from the April forecast, while Q3 was introduced at 8% (in line with our call). Notably, 2022Q4 was raised 3 ppts to 7.5%, while 2023Q4 is now 3.2% from 2.4%.
It's worth taking a look at Box 3 in the Monetary Policy Report where the Bank discusses a wage-price spiral. This type of worry was likely a big driver behind today's super-sized hike.
Bottom Line: Surging inflation and rising inflation expectations prompted today's surprise 100 bp rate hike from the Bank of Canada. Policy rates are poised to climb further, with Governor Macklem suggesting that rates are headed to the "top end or slightly above the neutral range" which the Bank believes is 2%-to-3%. We continue to anticipate the BoC will hike rates another 50 bps in September, but recognize that another larger increase could be in the cards given today's move. Consistent with the BoC's language, we have policy rates peaking at 3.5% by year end. We'll see if that's enough to notably cool inflation, though the growth backdrop just got a bit more challenging.