On Wednesday, the Bank of Canada increased its benchmark nightly interest rate by 0.5 percentage points to the top level in nearly 15 years, indicating that its historic tightening campaign was about to come to an end.
To combat inflation that is far higher than its target, the central bank raised rates at a phenomenal rate of 400 basis points (bps) in nine months, to 4.25%, a level last seen in January 2008. The bank attributed the most recent increase to the labour markets’ tightness and continued strong growth.
However, it dropped language indicating that rates would need to climb even more and did away with the forward projections it had been using ever since it started raising rates in March.
Avery Shenfeld, a chief economist at the CIBC Capital Markets, stated that even if the tightening cycle has likely passed its peak, it will take some time for these higher rates to hurt the economy and restrain inflation.
Money markets had gambled on an increase of 25 basis points, while a small majority of economists surveyed anticipated a move of 50 bps.
The third quarter’s gross domestic product growth, at an annualised 2.9%, was higher than forecast, and the bank noted there is still “inflationary pressure” in the economy and tight labour markets.
Overall, the central bank claimed that the data confirmed its prediction from last October that growth would slow until the middle of 2019.
In the near future, the Governing Council will assess whether an increase in the policy interest rates is necessary to balance supply and demand once again and bring inflation back to goal, according to a statement from the bank.
More than thrice the bank’s 2% mandate, the inflation rate of 6.9% in October was “still too high,” but three-month change rates in core inflation have fallen and suggest price pressures may be running out of steam, the bank said.
The interest rate terminal rate, or the peak level, was priced in by the money markets at 4.43% in June, an increase of around 7 basis points prior to the policy announcement.
Based on market expectations, there is a 70% possibility of another 25-bps increase.
According to Stephen Brown, a senior Canada economist at the Capital Economics, the Bank of Canada issued a fairly dovish 50 basis point policy rate boost today by easing its explicit future guidance that interest rates will need to climb even further.
The Bank is quite close to the conclusion of its tightening cycle, but no one would rule out a last 25 basis point interest rates boost in January, as per Brown in a note.
The bond market is now indicating that there is a possibility that if the bank’s tightening programme overshoots, it could lead to a more severe downturn than anticipated.
Following a low of 1.3699, the Canadian currency was trading 0.3% better at 1.3610, or 73.48 U.S. cents, after reaching its lowest point since November 4.
On January 25, during the next policy-making gathering, the Bank of Canada will also revise its macroeconomic projections.
In a similar vein, Barclays (BARC.L) said on Wednesday that it has replaced Mark Ashton-Rigby as a chief operating officer with Alistair Currie. This was part of Chief Executive C.S. Venkatakrishnan’s management reorganisation.
Vim Maru, who arrives from Lloyds Banking Group, will take over Currie’s position as head of the lender’s consumer payments and banking division.