The Bank of Canada was expected to come out flying, and it certainly didn’t disappoint as it increased interest rates by 50-basis points. This was the second hike in two months after the central bank had kept rates at an ultra-low 0.25% for close to two years.
The Bank of Canada has become the first in the G-7 to implement “super-size” hikes of 0.50%. This marks the first time the BoC has implemented a 0.50% rate since May 2000. In addition, the BoC announced that it would begin shrinking its balance sheet, a process known as quantitative tightening, at the end of April.
The dramatic news hasn’t had any impact on the Canadian dollar so far, which is unchanged on the day. USD/CAD was rising ahead of the announcement but has since given up all of those gains. That could change depending on the reaction to Governor Macklem’s press conference.
The BoC has clearly come out swinging in a determined effort to stamp out red-hot inflation. Many market players will be grumbling “it’s about time”, as the bank fell far on the inflation curve, with Macklem insisting that inflation would ease on its own. This is not how things unfolded, with inflation hitting 30-year highs, and the bank is now playing catch-up.
The BoC embarked on its rate-hike cycle in March, and the markets expect a lot more tightening, with expectations that rates could be as high as 3% in 12 months’ time. The challenge for Macklem & Co. is to pilot the economy to a ‘soft landing’, whereby inflation is lowered without choking off growth. If the BoC is overly aggressive with its rate hikes, the result could be a recession.
Canada’s labor market is in excellent shape, and Friday’s solid employment report may have helped the BoC opt for a 0.50% rate hike. The economy added a respectable 72.5 thousand new jobs in March, and the unemployment rate fell to 5.3%, down from 5.5%.
USD/CAD Technical
- USD/CAD broke above resistance at 1.2660 in the European session before retreating. Above, there is resistance at 1.2747
- There is support at 1.2531 and 1.2444
