Canada Monetary Policy
Central Bank Firm on Tightening;
Inflation Resistant Assets Increasingly Favoured
Bank remains hawkish in battle against inflation. In line with its July messaging, the Bank of Canada raised the overnight rate by another 75 basis points in September to 3.25 per cent, the fifth hike this year. This rate increase, coupled with the bank’s quantitative tightening program, has pushed interest rates to a 14-year high. The central bank’s decision was guided by a still elevated core inflation rate, high short-term inflation expectations, strong wage growth and the continued excess demand in the economy. The bank states that it expects to increase interest rates further, given the inflation outlook, but offered little forward guidance on the magnitude of these future rate hikes. However, the most recent trends of declining oil prices and improving global supply chains suggest reduced inflationary pressure in the latter part of the year. Meanwhile, the drop in Canada’s import volumes in July, the lower than expected second-quarter GDP, and expectations for softer retail sales in the fall all signal a slowing economy in the second half. These developments suggest that the BoC’s next move may not be as aggressive as the last two, and the hawkish monetary policy has likely already reached its peak.