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BOC Shows Concern On Rising Inflation Expectations

CANADA
  • The BOC hiked 25bps to 0.5% as expected and indicated further hikes to come, keeping to its newly found loose guidance that interest rates will need to rise further whilst also adding "the timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target".
  • Whilst "the unprovoked invasion of Ukraine by Russia is a major new source of uncertainty" the statement showed increased concern around longer-term inflation expectations:
  • "Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored."
  • vs previously from Jan 26: "Near-term inflation expectations have moved up, but longer-run expectations remain anchored on the 2% target". The Bank will use its monetary policy tools to ensure that higher near-term inflation expectations do not become embedded in ongoing inflation."
  • Information on quantitative tightening was limited at this stage but further info can't be ruled out from Macklem at multiple speaking events tomorrow: "The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement increases in the policy interest rate."
  • USDCAD dropped further on the announcement to a new session low, close to yesterday's new set support level, but has since unwound the move, not helped by Powell speaking concurrently. With the cross down -0.35%, the loonie continues to outperform other currencies today.
  • GoCs sold off further on the relatively hawkish stance announcement before trimming with the lack of detail on QT. Currently little changed on the announcement at the front-end (2YY +6.5bps from +6.9bps) but 10YY firming to +3.6bps from +4.6bps.
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