8.8 C
New York
Thursday, March 28, 2024

Bank Of Canada Hikes 50bps To Stem Inflation, Launches QT On April 25

Courtesy of ZeroHedge

As preview earlier (see below), moments ago the Bank of Canada indeed hiked rates by 50bps to 1%, as expected, the second rate hike in the post-covid era following a 25bps hike in March.

And, as also expected, the BOC announced that it is also ending reinvestment and will begin quantitative tightening (QT), effective April 25, adding that maturing bonds on the Bank’s balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decline over time, although there were no additional details.

In its statement, the BOC said that with the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further. The bank said that "the timing and pace of further increases in the policy rate will be guided by the Bank's ongoing assessment of the economy and its commitment to achieving the 2% inflation target."

Courtesy of Newsquawk, here is a redline comparison of the current and last BOC statements:

The BOC offered some perspectives on on the impact of the Ukraine war:

  • Price spikes in oil, natural gas and other commodities are adding to inflation around the world.
  • Supply disruptions resulting from the war are also exacerbating ongoing supply constraints and weighing on activity.
  • These factors are the primary drivers of a substantial upward revision to the Bank's outlook for inflation in Canada.

Of course, the BOC also discussed the Canadian economy, where "growth is strong and the economy is moving into excess demand." More details:

  • Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising.
  • Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.
  • While the COVID-19 virus continues to mutate and circulate, high rates of vaccination have reduced its health and economic impacts.
  • Growth looks to have been stronger in the first quarter than projected in January and is likely to pick up in the second quarter.
  • Consumer spending is strengthening with the lifting of pandemic containment measures.
  • Exports and business investment will continue to recover, supported by strong foreign demand and high commodity prices.
  • Housing market activity, which has been exceptionally high, is expected to moderate.

Since the BOC announcement was fully priced in, the market reaction was at best muted with the CAD unchanged on the day at 1.2646, Heading into the decision, the USDCAD traded around the 1.2658 region. As the Central Bank hiked rates by 50bps (18/29 analysts surveyed expect a 0.50% hike to 1.00%. the others expect a 0 25% move) and announced the start of QT, the initial reaction saw USD/CAD knee-jerk lower to 1.2625 (just shy of its 200 DMA at 1.2623) before retracing the move, potentially as details on balance sheet rundown remain light. The pair stabilized around pre-announcement levels shortly after whilst the 50 DMA is seen at 1.2661 and the 100 DMA at 1.2687.

Our preview published earlier: BoC rate decision due Wednesday April 13th at 10am EDT

  • 18/29 analysts surveyed expect a 0.50% hike to 1.00%, the others expect a 0.25% move.
  • BoC is likely to reveal its QT process.
  • The MPR will likely see inflation revised higher for the year before cooling in 2023, any revisions to the neutral rate will also be sought.

SUMMARY: The BoC is expected to hike rates by 50bps to 1.0%, although the survey was not unanimous with 11/29 expecting a 25bp move, but market pricing is more or less fully priced in for 50bps in April. The Central Bank will also likely announce the details of their Quantitative Tightening (QT) process after hints from Governor Macklem and Deputy Governor Kozicki where they are expected to announce the end of the reinvestment phase. The balance sheet runoff is expected at a relatively fast pace as roughly 40% of their bonds are set to mature within the next two years. The meeting will be accompanied by the Monetary Policy Report, which will likely see inflation for the year revised higher following the spike in commodity prices, but it is expected to cool next year, albeit it is still not seen returning to target until at least 2024. Some analysts also expect a revision higher to the neutral rate forecasts, perhaps to 2.75% from 2.25%, but others suggest it will be left unchanged. The rate decision will be accompanied by a press conference with Governor Macklem where commentary will be eyed on the magnitude of the rate hike as well as details about the QT process.

RATE PATH: The Bank of Canada is expected to hike rates by 0.5% on Wednesday, taking its Overnight rate to 1%, according to 18/29 surveyed by Reuters. The others expect a smaller 0.25% move, but the poll highlights that all five of the largest Canadian banks are expecting a 0.50% move, followed by another 0.50% in June. However, the wider poll, in a close margin, expects the pace of rate rises to slow to 0.25% each month, reaching 2% by year-end – 10/22 expect two 0.50% hikes in 2022, while nine expect just the one and three believe there will be zero 50bps hikes from the BoC. In 2023, the poll saw the overnight rate at 2.25% in Q2 23, before pausing until the end of 2023.

50BPS: Currently, a 50bps hike in April is more or less fully priced in, but there is a risk of a smaller 25bp increment. Although after the 25bp move in March and with inflation still rising above the BoC's target range, calls for 50bps have increased while the labour market remains strong and well above pre-pandemic levels, where it has been for some time. Deputy Governor Kozicki highlighted the primary focus is to return hot inflation to its target and that she is prepared to act "forcefully" with rate hikes to do so. She added the pace and magnitude of hikes will be discussed at the April BoC meeting. Kozicki also noted that inflation is too high while labour markets are tight and there is considerable momentum in demand. The latest BoC Business Outlook Survey also raised the alarm on inflation, where firms’ inflation expectations remain elevated. "More than two-thirds of businesses anticipate inflation will be above 3%, on average, over the next two years, while two-fifths expect it to be above 4%" – above the top end of the BoC's 1-3% target range. However, most firms expect inflation will be close to target in three years due to the expected rate hikes from the BoC and an improvement in supply chains. Kozicki was cautious about the high indebtedness, suggesting it could amplify the impact of rising rates and could worsen the impact of a future shock. However, she noted households on average are in better financial shape now than at the start of the 2017-18 tightening cycle.

OUTSIDE RISKS: Although the majority expect a 50bp move, there is a risk for a 25bp hike. As the BoC is expected to provide details of QT, it could be deemed as "overly hawkish" if they were to do this alongside a 50bp move. Meanwhile, analysts at Capital Economics highlight Governor Macklem “has developed a bit of a track record for doing less than markets are pricing in" after the BoC left rates unchanged in January and only hiked by 25bps in March. Cap Eco also highlighted the Central Bank may have concerns about the housing market as local real estate board data in Toronto showed average selling prices declined in March, which comes before the anticipated rise in mortgage rates. It is worth noting that analysts at Scotiabank, who have been calling for a more hawkish BoC, have suggested a larger 75bp hike cannot be ruled out as it believes the Central Bank is seriously behind in its fight against inflation.

QT: Based on recent commentary, it is likely we will see details on the BoC's Quantitative Tightening (QT) process; Governor Macklem said QT was the logical next step after rate rises begin and the timing of it will be transparent, while Deputy Governor Kozicki said QT will start in April. Governor Macklem noted when QT starts, the Bank will stop purchasing Canadian government bonds and maturing bonds would not be replaced when they roll off the balance sheet, suggesting a different approach to the Fed's proposed phase-in agenda. He suggested the balance sheet will shrink relatively quickly, with around 40% of the BoC's bonds set to mature within the next two years. The pace of QT will be determined by wage growth and longer-run inflation expectations. Macklem noted that when QT starts the BoC does not intend to actively sell bonds.

MPR: The meeting will also be accompanied by the latest Monetary Policy Report. We will likely see inflation forecasts revised higher in the short term amid the commodity price rally while the Reuters poll has inflation cooling next year, but it is expected to remain above the BoC's target until at least 2024. At the January MPR, CPI in 2021 was seen at 3.4%, then 4.2% in 2022 and 2.3% in 2023. GDP growth in 2021 was seen at 4.6%, 4.0% in 2022 and 3.5% in 2023. The Output Gap was seen as being essentially absorbed at around -0.75 to 0.25%. The Neutral Rate midpoint was at 2.25% (1.75% to 2.75%), some expect this to be revised higher to 2.75%, although others suggest it will be left unchanged.

Subscribe
Notify of
0 Comments
Inline Feedbacks
View all comments

Stay Connected

157,452FansLike
396,312FollowersFollow
2,280SubscribersSubscribe

Latest Articles

0
Would love your thoughts, please comment.x
()
x