Market Wire - Bank of Canada Launches Tightening Cycle, Loonie Holds Gains
Karl Schamotta - Chief Market Strategist, firstname.lastname@example.org
The Bank of Canada raised its benchmark rate by 25 basis points and hinted more hikes would be forthcoming as it fights surging inflation pressures.
In a statement-only decision, the Bank acknowledged a faster than expected expansion in the fourth quarter of 2021, confirming its view that “economic slack has been absorbed”, and turned more optimistic on first quarter, saying “growth is now looking more solid than previously projected”.
Policymakers said, “CPI inflation is currently at 5.1 percent, as expected in January, and remains well above the Bank’s target range. Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards”.
Geopolitical tensions were flagged as a possible downside risk to growth and an upside risk to inflation: “The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased. The situation remains fluid and we are following events closely”.
No new guidance was provided on quantitative tightening, with the statement saying the Bank would continue “its reinvestment phase, keeping its overall holdings of Government of Canada bonds on its balance sheet roughly constant until such time as it becomes appropriate to allow the size of its balance sheet to decline”.
The Canadian dollar extended this morning’s small gains, but remains tightly rangebound as ebbs and flows in global risk sentiment continuing to overshadow domestic developments.
Earlier this morning, in prepared remarks to be delivered to the House Financial Services Committee, Federal Reserve Chair Jerome Powell set the stage for a 25 basis point hike at the central bank’s March meeting, moving forward despite a “highly uncertain” economic backdrop. A release outlining his comments says “Making appropriate monetary policy in this environment requires a recognition that the economy evolves in unexpected ways. We will need to be nimble in responding to incoming data and the evolving outlook.”