The Bank of Canada has raised interest rates by 50 basis points. A move that was expected by the markets, and comes one week before the Federal Reserve interest rate decision.
Canada’s key policy interest rate now stands at 4.25%:
In the October Bank of Canada meeting, the central bank still had a hawkish tone and was saying it expects interest rates to rise more. The language has shifted to a more dovish tone. A wait and see approach:
“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target. Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate.”
With the economy slowing down, perhaps the Bank of Canada is coming close to pivoting. It all comes down to the inflation numbers. If we see consecutive months of inflation dropping, that would be a good sign. However, if inflation turns and heads higher, the Bank of Canada and other central banks would have to keep raising rates. Even the Bank of Canada admits that progress on inflation could be disrupted due to a geopolitical event.
The Bank of Canada will continue its quantitative tightening policy. Growth looks likely to stall in 2023:
In Canada, GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline. Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.
The central bank also states that inflation is still too high and that short term inflation expectations remain elevated. The longer consumers and businesses expect inflation to be above the 2% target, the greater the risk that high inflation becomes entrenched.
So interest rates technically should be heading higher… but the governing council will be watching the data points to see if rate hikes are slowing down the economy, and will assess rate hike needs on a meeting-to-meeting basis.
The Canadian TSX markets are slightly higher after today’s perceived hawkish Bank of Canada policy statement. Although the TSX is following the trend of most global equity markets. It has rejected a resistance zone and it looks like the chart is hinting at more lows.
The Canadian Loonie gained against the US Dollar. Nothing to get too excited about yet for Canadian shoppers looking to cross the border anytime soon. This pullback is just retesting the breakout zone of 1.3550. As long as USDCAD remains above this zone, the US Dollar strength can continue… especially if next week the US Federal Reserve remains hawkish in their language.