MNI STATE OF PLAY: BOC Hikes 50BP, Says More Needed, Starts QT

Canada's central bank Wednesday raised its key lending rate by 50bps to 1%, said future moves are needed to prevent elevated inflation expectations from becoming entrenched, and said it will start allowing balance-sheet assets to roll off later this month.

"With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further," Governor Tiff Macklem and his deputies wrote in the decision. "The timing and pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target." The statement didn't contain past key words such as the potential to be forceful or to move along a path of tightening.

Consumer prices will jump 5.3% this year instead of the 4.2% expected in January as the Ukraine invasion rattles energy and commodity markets, the Bank said. Inflation will remain near the top of the Bank's 1%-3% target band next year with a 2.8% gain and won't return to 2% until sometime in 2024, policymakers predict.

While the statement said quantitative tightening will begin April 25, there were few details beyond that saying that ending reinvestment will slim the balance sheet "over time" and affirmed the prior estimate for federal bond holdings to fall 40% over the next two years. The Bank will publish a more detailed market notice later today and Macklem may discuss QT at a press conference.

Most economists predicted a 50bp hike and a balance sheet run-off announcement. The hike followed a March rise of 25bp and is Canada's first half-point hike since 2000. Before the decision several economists predicted another 50bp increase at the next meeting June 1, and while one expert has told MNI the Bank needs to consider outright asset sales, most economists see this as unlikely.

HIGHER NEUTRAL

The Bank's estimated neutral interest rate was boosted 25bp to 2.5%, a sign a little more tightening may be needed to brake inflation. Former Governor David Dodge has told MNI the BOC must hike rates to a neutral level just over 2% in a hurry as inflation tests public confidence.

The job is perhaps more difficult after Thursday's federal budget that extends deficits and spending on things business groups say will boost inflation. On the other hand, the Bank could turn less hawkish later this year with heavily indebted consumers more vulnerable than in past cycles, and because higher oil prices and rate hikes in other nations may curb global demand. New Zealand’s central bank on Wednesday hiked interest rates by 50bps to 1.5% and Federal Reserve officials have said a half-point hike could come in May.

"The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored," the BOC's decision said.

Source: BOC