In a move that surprised the market, the Bank of Canada (BoC) hiked the target overnight rate to 1% at today’s monetary policy meeting. This is the second hike in a row for the BoC. The market was not expecting the next rate hike until the Bank’s October meeting.
The rationale in the statement for raising rates for a second time was the belief that economic growth is both broad-based and sustainable. The BoC referenced robust consumer spending and solid employment and income growth as reasons for the hike, while acknowledging inflation remains below their 2% target.
The statement also mentioned significant risks coming from geopolitical uncertainties and international trade as things they were keeping an eye on. The BoC made no attempt to downplay the recent strong appreciation of the Canadian dollar.
While the BoC expects moderation in economic performance during the remainder of the year, it acknowledged that growth is currently ahead of expectations. The Bank will be watching economic potential, labour market conditions and elevated household debt to determine whether further moves are necessary.
We believe the Bank’s tone is hawkish enough to imply a continued risk of higher interest rates and an appreciating Canadian dollar.