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.