The Bank of Canada upped its policy rate by 100 basis points to 2.5% on Wednesday, exceeding the 75 basis point increase forecast, and is continuing its quantitative tightening as it fights to contain inflation. “Inflation is higher, abundant, and more persistent than the Bank anticipated in its April Monetary Policy Report and will most likely remain around 8% in the coming months,” according to the Central Bank.
The Canadian dollar is up 0.2% against the US dollar, trading at US$0.7694. However, Invesco CurrencyShares Canadian Dollar Trust (NYSEARCA:FXC) is barely changed at $75.15 as of 10:12 a.m. ET. Meanwhile, the iShares MSCI Canada Index Fund (NYSEARCA:EWC) is down 1.0%. While the Bank recognizes that the Ukraine war and supply chain interruptions have been the primary drivers of inflation, it also notes that “internal price pressures from excess demand are becoming more prominent.”
Monetary policy is only concerned with the demand side of the equation. Consumers and companies are less keen to take on more expensive debt when interest rates climb. As a result, demand should fall. The Bank of Canada estimates that Canadian GDP increased by 4% in Q2; growth is expected to slow to 2% in Q3. Bank stocks in Canada are in the red. The Toronto Dominion Bank (NYSE:TD) is down 2.1%, the Royal Bank of Canada (NYSE:RY) is down 1.4%, the Bank of Montreal (NYSE: BMO) is down 1.7%, the Canadian Imperial Bank of Commerce (NYSE:CM) is down 1.3%, and Nova Scotia Bank (NYSE:BNS) is down 1.5%.
In an effort to control inflation, Canada’s central bank raised its interest rate by 50 basis points to 1.5% last month. This was the central Bank’s second boost of this magnitude as it strives to contain inflation. The Bank also stated in its judgment at the time that inflation is likely to rise before it subsides.
The Bank noted, “Almost 70% of consumer price index categories now show inflation over 3%, and the likelihood of elevated inflation becoming entrenched has increased. The Central Bank will use its monetary policy tools to bring inflation back to target and to maintain inflation expectations properly anchored.”
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