After remaining on hold for four consecutive months, the Bank of Canada "couldn't sit still any longer" and removed the wording about being prepared to raise interest rates further if necessary, without providing forward guidance...
On Wednesday evening Beijing time, the Bank of Canada unexpectedly raised interest rates by 25 basis points to 4.75%, the highest level since 2001, while the market generally expected it to remain unchanged, as the Bank of Canada had been on hold for four consecutive months.
Following the data release, the US dollar fell sharply against the Canadian dollar by 60 points.
In the statement, the Bank of Canada removed the April wording about being prepared to raise interest rates further if necessary. It stated in the interest rate announcement:
"Overall, excess demand in the economy appears to be more persistent than anticipated."
Since announcing a conditional pause in rate hikes in January, policymakers have warned that further rate hikes may be necessary. Although some Canadians have felt the pressure of rising borrowing costs, the central bank's move indicates that officials are concerned that without another rate hike, economic growth momentum will not slow down sufficiently.
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The Bank of Canada stated, "Monetary policy is not restrictive enough to balance supply and demand, nor to bring inflation back to the 2% target on a sustained basis," citing numerous pieces of evidence, including stronger-than-expected output growth in the first quarter, rising inflation, and a rebound in real estate market activity.
Previously, the Reserve Bank of Australia unexpectedly raised interest rates by 25 basis points on Tuesday. The Bank of Canada was the first and only central bank among the G7 to pause its rate hike cycle.
Now it has changed its mind, acknowledging that despite the economy being more resilient than expected, it still needs to raise borrowing costs to curb inflation.
Bank of Canada Governor Macklem and his colleagues pointed out that the three-month moving indicator measuring underlying price pressures was the key reason for their action. They stated, "There is growing concern that CPI could be significantly above the 2% target."The statement did not contain forward-looking guidance, suggesting that policymakers are still uncertain whether this rate hike will ultimately be a minor adjustment or the beginning of a new round of rate hikes. Officials said they plan to study the evolution of excess demand, inflation expectations, wage growth, and corporate pricing behavior.
During the U.S. regional banking crisis in March, the Bank of Canada seemed to pause rate hikes at the right time—they did not cause a hard landing for the Canadian economy, and inflation has slowly declined.
But now the data suggest that this pause was premature. It turns out that the Canadian economy's "immunity" to rising borrowing costs has surprised most economists.
Many believe that the huge debt burden and inflated real estate market are important reasons why Macklem may stop raising interest rates before Federal Reserve Chairman Powell and his peers.
The Bank of Canada stated that GDP is stronger than expected, including "broad-based" consumer growth, even taking into account record population growth.
Policymakers also described Canada's labor market as "tight," noting that while immigration and higher participation rates are expanding the labor supply, new employees are being hired immediately, reflecting "continued strong demand for labor."
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