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A Surprisingly Hawkish BoC

CANADA
  • A hawkish statement from the BoC, with the key change the Bank now being prepared to act ‘more’ forcefully if needed to meet its 2% inflation target.
  • Language throughout had a hawkish tilt. Growth was dialled up from “the economy is moving into excess demand” to “the economy is clearly operating in excess demand”.
  • Inflation expectations were also firmed from “There is an increasing risk that expectations of elevated inflation could become entrenched” to “The risk of elevated inflation becoming entrenched has risen”.
  • Front-dated GoC yields sit 8bp higher with the announcement for +14bps on the day (vs 10bps for Tsys) but it coincides with a solid beat for US ISM manufacturing.
  • The latter dominates USDCAD with the pair sitting 20pips higher at 1.2636 but still -0.05% on the day having run lower ahead of the announcement. The hawkish tone should support CAD ahead, barring a surprise dovish step back at tomorrow’s Economic Progress Report.
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