The Bank of Canada lifted its benchmark rate to 3.25 percent this morning, delivering a 75 basis point hike while adjusting its language in a data-dependent direction – a shift that could signal smaller hikes in the months to come.
In the statement accompanying the decision, the central bank noted a moderation in headline inflation as gasoline costs slumped in July, but pointed to elevated core measures as evidence price pressures have continued to build across the economy.
Officials signalled more tightening to come, saying, “Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further”.
But “front-loading” language was removed, and signs of decelerating growth were subtly acknowledged, with the statement saying, “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” – verbiage that could set the stage for a reassessment in terminal rate expectations.
The country’s terms of trade are deteriorating as commodity prices fall: earlier this morning, Statistics Canada said the trade surplus fell to $4.1 billion in July, down from a revised $4.9 billion in June as oil and natural gas benchmarks slid.
Serious economic pain is coming: Canada’s private sector is carrying some of the biggest debt burdens in the developed world, and borrowing costs are rising as global yields climb.
The Canadian dollar moved slightly lower in the moments after the decision. Most traders were looking for a 75 basis point hike, but the thread of caution running through the statement was unexpected, and rate forecasts are modestly lower across the front of the curve. Longer-term rates are more stable: Canadian two-year yields exceed their US equivalents by 20 basis points, while the ten year spread favours the US by 10 basis points.
Deputy Governor Carolyn Rogers is scheduled to deliver an “economic progress report” in Calgary tomorrow, and investors will be monitoring her remarks for guidance on the path forward.
Karl Schamotta, Chief Market Strategist