Bank of Canada lifts key rate to more than two decades high

TORONTO (Reuters) - The Bank of Canada on Wednesday hiked its key overnight benchmark rate to 4.75%, the highest level in 22 years, on increasing concerns that inflation could get stuck significantly above its 2% target amid persistently strong economic growth.

STORY:

MARKET REACTION: CAD/

LINK:https://www.bankofcanada.ca/2023/06/fad-press-release-2023-06-07/

COMMENTS

JAY ZHAO-MURRAY, MARKET ANALYST AT MONEX CANADA

"With more excess demand in the economy than the Bank (of Canada) had previously forecast, a raging hot labour market, and resurging inflation pressures, the Bank decided that the evidence was now sufficiently clear to raise the policy rate and lean against the wind."

"In our view, today's decision is unlikely to be a one and done and we now look for the BoC to hit a terminal rate of 5% on July 12th. With the Fed expected to pause next week, the further narrowing in rate differentials should support CAD in the near-term."

ANDREW KELVIN, CHIEF CANADA STRATEGIST, TD SECURITIES

"We did expect the BoC to lift rates today. The move was warranted given the upside surprises that we've seen in both GDP growth and inflation in recent months, and we do continue to look for them to tighten again in the at the July meeting."

"It's a fairly short communique, which I think is smart.

It gives them a fair degree of flexibility if they go to the July meeting. But at the end of the day, the Canadian economy has shown remarkable resilience through 2023 and as such to bring demand lower, which is the Bank's goal to achieve their 2% inflation target, we just simply need more tightening."

KATHERINE JUDGE, SENIOR ECONOMIST, CIBC CAPITAL MARKETS

"The Bank of Canada hiked rates by 25bps to bring the overnight rate to 4.75%. That was justified by the unexpected strength in consumption growth and interest-sensitive areas of the economy, along with the tightness in the labour market."

"The statement also highlighted concerns that inflation could get stuck materially above the 2% target, given the recent readings on core inflation and persistent excess demand. It's therefore possible that we could see a follow up hike if signs of economic slack opening up aren't clear in forthcoming data, although the guidance around being prepared to raise the policy rate further was removed from this statement.

DEREK HOLT, VICE PRESIDENT OF CAPITAL MARKETS ECONOMICS AT SCOTIABANK

"We expect another 25 bps coming in July, it is like a bag of chips, you open one and just can't have one. I think they have another one on the cards but we will cement that cause as we get further data added up. Also a lot depends on from now to July. The jobs numbers, the CPI data and what Fed does."

ROYCE MENDES, DIRECTOR & HEAD OF MACRO STRATEGY AT DESJARDINS

"Monetary policymakers will be watching the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour in deciding whether rates need to move even higher. That said, it's unlikely they'll see enough progress towards restoring price stability before their next scheduled rate decision for this to be the final hike of the cycle. As a result, we continue to lean towards another 25 basis point rate hike in July, which would take the policy rate up to 5%, the highest since 2001. The market is now close to pricing that in, with bond yields selling off as rate cuts are pushed further into the future."

(Reporting by Fergal Smith, Divya Rajagopal and Nivedita Balu; Editing by Denny Thomas)