The Bank of Canada lifted interest rates by 25bps to 0.50% as expected on Wednesday, adding that it expected it will need to raise interest rates further. The BoC said that it would continue with the reinvestment phase of its balance sheet, maintaining its overall holdings of Canadian government bonds at roughly the same level.
Additional Takeaways:
"The Russian invasion of Ukraine is a major new source of uncertainty."
"Inflation is now expected to be higher in the near term than projected in January."
"Price increases have become more pervasive and measures of core inflation have all risen."
"Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards."
"The Russian invasion has pushed prices of oil and other commodities sharply higher, which will add to inflation around the world."
"Negative impacts on confidence and new supply disruptions could weigh on global growth and financial market volatility has increased. The situation remains fluid."
"Canada Q1 growth is looking more solid than previously projected, while Q4 growth confirms the bank's view that economic slack has been absorbed."
"The BoC will use monetary policy tools to return inflation to the 2.0% target and keep inflation expectations well-anchored."
"The BoC will be considering when to end reinvestment phase and start quantitative tightening."
"Economies are recovering from the Omicron variant of Covid-19 more quickly than expected. The rebound in Canada appears to be well in train."
Market Reaction
USD/CAD was a little choppy in the immediate reaction to the BoC's rate decision, swinging within about a 25 pip range in the 1.2660-1.2690 area, but has since calmed down. The BoC appears not to have delivered any surprises, as far as FX markets are concerned anyway.