Bank of Canada Warns “Inflation Is Too High,” Makes Biggest Hike Since 1998

Canada’s economy got a bit of a surprise this morning — a massive rate hike. Analysts expected the Bank of Canada (BoC) to make a big move, just not the biggest in over 20 years. The central bank is hoping to temper inflation expectations by showing they’ll do whatever it takes. Canadians now face the highest rates since 2008, while being sold on a soft landing.

Bank of Canada Hits The Market With A Bigger-Than-Expected Hike

The BoC made a bigger-than-expected move, front loading rate hikes. This morning’s move was a full 100 basis points (bps), the equivalent of four hikes in one. Market participants had priced in a very large increase of 75 bps. Many were skeptical that even 75 bps could happen, but the BoC surprised virtually everyone. 

Biggest Rate Hike Since 1998, Highest Rate Since 2008

The lift in rates ushered in a new era with several new multi-year records. The 1 point increase to the overnight rate was the largest Canada has seen since 1998. With the hike, that brings the overnight rate to 2.5% — the highest since 2008. We explained this would be the case last week, but it’s still surprising to see it actually happen. 

Why? Canada’s Inflation Is Too Damn High 

The central bank cited three key reasons for making such a large move:

  • Inflation is too damn high. Okay, they didn’t say damn, but the Governor’s first point was actually “…inflation is too high…”
  • Canada’s economy is overheated. The central bank reiterated the economy has “clearly” moved into excess demand.
  • It’s been too damn long. The central bank warned they’re taking an aggressive stance because persistent high inflation is harder to resolve. The longer it takes to move, the more severe measures need to be taken making a soft landing less likely.

Bank of Canada Is Also Gradually Reducing Credit Liquidity

But wait, there’s more! The BoC reiterated it will continue on its path of quantitative tightening (QT). Quantitative ease (QE) injected liquidity into the bond market, driving borrowing costs lower than interest rates would support. QT is designed to reverse that move, restoring market mechanics. QT helps to reverse the boost QE gave to inflation and asset prices. It might be hard to swallow, but these are still stimulated rates — not the market. 

If a hike is 25 bps, a “super hike” is 50bps, then this was a double super hike. Maybe we should term it a “Macklem?” 

In any case, the double super hike is likely a front-load to change the public’s mindset. By being unpredictable, they help break the public’s expectations of higher rates. A problem the BoC recently discovered from its consumer and business survey that found Canadians expectations for inflation are rising even further. It must have been  a real shocker, considering this came shortly after the BoC told them they’ll bring it down. 

Unfortunately, the BoC may lack credibility with some after the transitory issue. Already we found instances of mortgage brokers telling clients this is just temporary. Many people see the BoC’s attempts to cool inflation to be the only thing transitory.

6 Comments

COMMENT POLICY:

We encourage you to have a civil discussion. Note that reads "civil," which means don't act like jerks to each other. Still unclear? No name-calling, racism, or hate speech. Seriously, you're adults – act like it.

Any comments that violates these simple rules, will be removed promptly – along with your full comment history. Oh yeah, you'll also lose further commenting privileges. So if your comments disappear, it's not because the illuminati is screening you because they hate the truth, it's because you violated our simple rules.

  • Marco 7 months ago

    This is what happens when you have an incompetent at the head of the country.
    It’s JustinFlation.

    • RM 6 months ago

      I’m not a fan of Trudeau but, in fairness, the world is experiencing inflation, not just Canada.

  • Gerald Haw 7 months ago

    Inflation was high when we hit full employment at the beginning of 2021. It’s now at the point where rate hikes are now increasing inflation because it’s now embedded.

  • Busrider 7 months ago

    I find this argument by BoC interesting: “they’re taking an aggressive stance because persistent high inflation is harder to resolve. The longer it takes to move, the more severe measures need to be taken making a soft landing less likely”. Follow this train of thought further; this 1% rate hike is itself a “severe measure”, historically and certainly relative to the low-balling they’ve been doing for months. So aren’t they tacitly admitting that a soft landing isn’t likely?

    • J 7 months ago

      It sends the message that for the remainder of the year that 3x 100 bps “mega hikes” may be a reality. Industry and media should get that message out to the masses before people take out more massive loans.

      However, the majority of the population don’t speak BoC/Financials. Worse yet, you have an entire industry who relies on selling homes on mortages to get paid via commissions. They’re all (scratch that, some are) telling their clients that this is transitory. So many industry “expert” forcasts see housing prices still increasing by Q4 2022 (what a load of BS).

      This is a strong signal that more “mega hikes” are on the table, so stop borrowing to inflate assets. Lets be honest, 2.5% is still stimulating considering historic interest rates before the pandemic. Unfortunately, some people who bought into the peak will be feeling pain in a couple of years.

      The overnight rate at 5.5% is very possible given that they’re still 3 to 5% away from the target inflation rate (June’s inflation numbers will show what the hikes have had any effects).

    • J 6 months ago

      There won’t be a landing for many – just a black hole called bankruptcy. Hopefully, they’ll teach their children and their children’s children about mortages and financial responsibility.

Comments are closed.