- BoC hiked 75bps as expected…
- ...and retained guidance toward further rate hikes
- Bonds were slightly caught off guard hoping for a dovish pivot they didn’t get
- We expect another +50bps in October with a full set of fresh information
While the Bank of Canada largely met my expectations, its actions were taken a touch more hawkishly by markets as some were positioned for a somewhat more dovish spin. They didn’t get that at all and so the two-year Canada yield backed up by about 4bps and the 5-year yield increased by about 4bps. USDCAD was little changed in the aftermath. Chart 1 shows a slight rise in meeting pricing pre-statement (red) and post-statement.
First, the BoC hiked its overnight rate by 75bps to 3.25% which brings cumulative rate hikes to 300bps since March. That part was fully priced going in although there was the risk they could have gone by more or less.
Second, the statement retained hike guidance and was very clear about this:
“Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further.”
The data dependent aspect of this guidance was similar to prior statements.
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target.”
A few of the details also worked against more dovish takes on what they might have done but did not. For example, the Governing Council is looking through the small deceleration in headline inflation and remains more focused upon rising and broadening core inflation while expressing ongoing concern toward unmoored inflation expectations:
“However, inflation excluding gasoline increased and data indicate a further broadening of price pressures, particularly in services. The Bank’s core measures of inflation continued to move up, ranging from 5% to 5.5% in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched."
Governing Council also looked through the fact that Q2 GDP growth was a little less strong than they had forecast in the July MPR and did so by emphasizing the domestic details:
“While this was somewhat weaker than the Bank had projected, indicators of domestic demand were very strong—consumption grew by about 9½% and business investment was up by close to 12%.”
I should also note that balance sheet plans remain on autopilot for now. No one seriously expected that to change today and I don't think they'll taper full roll-off of maturing GoC bonds any time soon just to accommodate issuance pressures.
Overall the short and sweet statement buys time for a fuller reassessment on October 26th. We expect another 50bps hike to 3.75% at that time and incoming information between now and then may further inform the likely bias. A full Monetary Policy Report including fresh forecasts will be delivered and the BoC will issue Q3 surveys of business and consumer attitudes including inflation expectations on October 17th.
Please see the attached statement comparison, albeit one that is less useful when comparing non-MPR statements like today’s to fuller MPR-statements like the previous one in July. SDG Rogers’ speech headlines arrive at 11:25amET with a 1pmET presser.
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