Bank of Canada recap: BOC surprises traders with a 100bps hike, USD/CAD falls below 1.30

As we noted in our BOC preview report, markets were confident that the Bank of Canada would raise interest rates by 75bps…but BOC Governor Tiff Macklem and company defied expectations, opting instead for a 100bps hike to 2.50%. Up from just 0.25% at the start of the year, Canada’s overnight rate is now tied with New Zealand’s for the highest target rate among major central banks.

Highlights from the BOC’s monetary policy statement follow (emphasis mine):

• Inflation continues to rise, and price pressures are broadening. Consumer price index (CPI) inflation will average close to 8% in the middle quarters of 2022.
• The Canadian economy is overheated, and labour markets are tight. The unemployment rate is at a series low, and elevated job vacancies and widespread labour shortages are pushing up wage growth.
• With global growth moderating and higher interest rates dampening domestic spending, growth in Canada is projected to slow from 3½% in 2022 to 1¾% in 2023 and 2½% in 2024.
• Domestic price pressures are expected to abate, global supply chain problems are anticipated to resolve gradually, and energy prices are projected to decline. Inflation in Canada is anticipated to decrease to roughly 3% by the end of 2023 and return to the 2% target by the end of 2024.
• The Bank is guarding against the risk that high inflation becomes entrenched because if it does, restoring price stability will require even higher interest rates, leading to a weaker economy.

Notably, the central bank revised down its forecast for GDP growth in 2022 and 2023 (to 3.5% and 1.8% respectively) while revising up its inflation forecasts for 2022 (7.2%), 2023 (4.6%), and 2024 (2.3%). In a small silver-lining for those who were expecting a more modest move, the last bullet hints that the central bank may be “front loading” its rate hikes, meaning the pace of interest rate increases could slow or pause as we move into the fourth quarter, but for now the main takeaway is that the BOC is more hawkish than expected.

BOC Governor Macklem is starting his press conference as we go to press – be sure to follow us on Twitter for any salient updates from his comments!

Technical view: USD/CAD

Technically speaking, USD/CAD saw a quick drop in the wake of the BOC announcement, essentially offsetting the spike in the greenback following this morning’s hotter-than-expected US CPI report. Now, the pair sits in the middle of its well-defined 1-month range between 1.2850 and 1.3080. In the short-term, the BOC’s relatively hawkish stance could keep USD/CAD capped below 1.3080.

Source: StoneX, TradingView

Traders will soon shift their focus to the FOMC monetary policy meeting at the end of the month, with a 100bps rate hike from the Fed now on the table following the BOC’s move and elevated US inflation reading.