BoC recap: Rates up... and another one on the cards?
The Bank of Canada (BoC) raised its overnight rate by 25 basis points to 2.5%, warning that higher-for-longer energy prices and stronger cost pass-through could keep inflation elevated. Governor Tiff Macklem said another increase may be needed, although the Governing Council remains cautious and has not set a predetermined path.
TThe BoC said it acted to reduce the risk that persistent energy costs would spread more broadly through the prices of goods and services. Businesses have largely absorbed higher input costs so far, but the Bank’s surveys suggest they will pass more of those costs on over the coming year. Macklem said inflation now looks less likely to remain well contained, while longer-term expectations remain anchored.
Signs of excess supply and a weaker housing market complicated the decision. Macklem said the policy rate, even after the hike, was not high enough to restrain growth, but Rogers acknowledged that borrowing costs were already weighing on housing. The Bank also faces considerable uncertainty over trade ties with the US and the wider economic outlook.
The overall message was hawkish but measured. Further tightening remains possible if energy-driven inflation becomes broader or more persistent, yet Macklem stressed that there is no predetermined rate path and that each decision will depend on the inflation outlook and incoming data.
Bank of Canada FAQs
The Bank of Canada (BoC), based in Ottawa, is the institution that sets interest rates and manages monetary policy for Canada. It does so at eight scheduled meetings a year and ad hoc emergency meetings that are held as required. The BoC primary mandate is to maintain price stability, which means keeping inflation at between 1-3%. Its main tool for achieving this is by raising or lowering interest rates. Relatively high interest rates will usually result in a stronger Canadian Dollar (CAD) and vice versa. Other tools used include quantitative easing and tightening.
In extreme situations, the Bank of Canada can enact a policy tool called Quantitative Easing. QE is the process by which the BoC prints Canadian Dollars for the purpose of buying assets – usually government or corporate bonds – from financial institutions. QE usually results in a weaker CAD. QE is a last resort when simply lowering interest rates is unlikely to achieve the objective of price stability. The Bank of Canada used the measure during the Great Financial Crisis of 2009-11 when credit froze after banks lost faith in each other’s ability to repay debts.
Quantitative tightening (QT) is the reverse of QE. It is undertaken after QE when an economic recovery is underway and inflation starts rising. Whilst in QE the Bank of Canada purchases government and corporate bonds from financial institutions to provide them with liquidity, in QT the BoC stops buying more assets, and stops reinvesting the principal maturing on the bonds it already holds. It is usually positive (or bullish) for the Canadian Dollar.
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