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Market Wire - Bank of Canada Hikes 50 Basis Points, Loonie Moves Sideways

CalendarJune 1, 2022
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Karl Schamotta, Chief Market Strategist: karl.schamotta@corpay.com

The Bank of Canada hiked by 50 basis points for a second consecutive time, lifting its benchmark rate to 1.5 percent as it struggles to bring soaring prices under control. In the statement accompanying the decision, the central bank led by Tiff Macklem said price growth “will likely move even higher in the near term before beginning to ease, “ and the “risk of elevated inflation becoming entrenched has risen”. 

Officials acknowledged clear signs of overheating, saying “Canadian economic activity is strong and the economy is clearly operating in excess demand…Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels”. 

Policymakers also signalled more tightening to come, again including a sentence saying “interest rates will need to rise further”. Markets expect the Bank to hike by another 50 basis points in July, with smaller back-to-back moves coming at meetings through the rest of the year as policymakers work to bring rates closer to neutral territory.

The announcement was not accompanied by a Monetary Policy Report, but Deputy Governor Paul Beaudry is scheduled to speak tomorrow, and will likely provide further insight into the Bank’s growth and inflation expectations. 

The Canadian dollar whipsawed within a 20 basis point range in the minutes after the decision. Many traders were expecting a bigger increase - implied odds on a 75-basis point hike were slightly better than a coin toss ahead of the meeting - but currency markets were also responding to a better-than-expected ISM report, which showed prices dropping and sentiment in the US manufacturing sector improving far more than anticipated last month. 

The loonie continues to dance to a tune played elsewhere, with price action reflecting changes in global risk appetite more than domestic fundamentals. Major engines of the Canadian economy - housing, consumer consumption, and exports - remain vulnerable to a tightening in financial conditions. 

Author

Karl Schamotta

Karl Schamotta

Chief Market Strategist

Karl leads Corpay’s currency research group, focused on analyzing shifts in the world economy and creating strategies that help businesses harness market volatility.

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