VIEW Bank of Canada surprises with smaller-than-expected interest rate increase

The Bank of Canada announced a smaller-than-expected 50-basis point rate hike on Wednesday and said future increases would be influenced by its assessment of how tighter policy was working to slow demand and ease inflation.

The central bank, in a regular decision, increased its policy rate to 3.75% from 3.25% and has now lifted rates by 350-bp since March. Economists and money markets were betting on a 75-bp move ahead of the decision.

"Today's...interest rate hike...suggests that the Bank of Canada is growing confident that its actions so far will be enough to vanquish inflation although, by doing less than markets were pricing in, the Bank risks sending too dovish a message that it will eventually have to reverse." "After spending the last two months telling us that the only thing that matters for the policy outlook is core inflation, inflation expectations and the tightness of the labour market, the Bank dropped down to a 50 bp hike today – despite elevated core inflation, inflation expectations and the tightness of the labour market. That came as a surprise to forecasters, with the consensus shifting up to a 75 bp hike following the strong core CPI data last week. It is hard to see much justification for the slower pace of tightening in the Bank’s new forecasts either."

"While the Bank slowed the pace of its tightening, it reiterated that it still judges that 'the policy interest rate will need to rise further'...At the very least, that means there is one final interest rate hike ahead, of 25 bp, to take the policy rate to 4.00% although, given the stickiness of core inflation, the terminal rate may still end up a little higher than that."

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