BoC Hikes Benchmark Rate by 100 BP!

The Bank of Canada (BoC) today raised its benchmark rate by a full 100 basis points (bp), taking it to 2.50%. An increase of 75 bp has been expected ever since the US Federal Reserve's Federal Open Market Committee implemented a 75 bp increase in its overnight rate in June, but a full 100 bp indicates an extremely hawkish stance. The Bank said it expects inflation to be around 8% for the next few months - driven by the war in Ukraine, continuing supply chain disruptions, robust domestic demand and a boost in the value of exports - before cooling to 3% by the end of 2023 and 2% (the target rate) by 2024. The BoC forecasts GDP will grow by an annualized 4% in Q2 and 2% in Q3, winding up the year at 3.50%. The overall tone of the announcement is hawkish, saying it "continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation," and that it "is resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target." Implicit in this statement is that the BoC is likely to raise rates above the nominal neutral policy rate range (interest rates that neither stimulate nor slow down the economy) of 2% to 3% - and perhaps well above that - until inflation is tamed. You can read the announcement here.