West News Wire: On Wednesday, the Bank of Canada increased its benchmark overnight rate by 50 basis points to the highest level in over 15 years, indicating that the historic tightening cycle was about to come to an end.
To combat inflation that is far higher than its aim, the central bank raised rates at a record pace of 400 basis points in nine months, to 4.25 percent, a level last seen in January 2008. The bank attributed the most recent increase to the labor markets’ tightness and continued strong growth.
However, it did away with the forward guidance that had been used to indicate that rates would have to climb further ever since it started raising them in March.
“While the tightening cycle likely has reached its zenith, we’ll need the pain of these higher rates to persist for a while to stall economic growth and thereby cool inflation,” said Avery Shenfeld, the chief economist at CIBC Capital Markets.
Money markets had bet on a 25-basis-point (bps) increase, but a slim majority of economists in a Reuters poll expected a 50-bps move.
Gross domestic product growth in the third quarter, which grew at an annualised 2.9 percent, was stronger than expected and there is still “excess demand” in the economy, while labour markets remained tight, it said.
Overall, however, the central bank said that data supported its October forecast that growth would stall through the middle of next year.
“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,” the bank said in a statement.
Inflation, which clocked in at 6.9 percent in October, “is still too high”, but three-month rates of change in core inflation have declined and indicate “prices pressures may be losing momentum,” the bank said.
“They continued to worry about inflation becoming entrenched and that’s what this rate hike (is) really about,” Royce Mendes, the head of macro strategy at Desjardins Group, said in a research note.
If the bank’s tightening campaign overshoots, it could trigger a deeper downturn than expected, something that the bond market is now signalling is a risk.
The Canadian dollar was trading 0.3 percent higher at 1.3614 to the greenback, after earlier touching a one-month low at 1.3699.
