MNI STATE OF PLAY: BOC Hikes 50BPs, Says Can Be More Forceful

The Bank of Canada raised its key lending rate half a point to 1.5% on Wednesday and said it's "prepared to act more forcefully if needed" to restore 2% inflation.

"With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further," Governor Tiff Macklem said in a one-page statement that devoted 14 sentences to domestic and global inflation risks.

The statement didn't make any clear reference to a neutral rate estimated at around 2.5%. The policy rate hasn't been 1.5% since late 2018 and hasn't breached 2% since 2008 when it ranged between 2.25% and 4.25%.

Economists unanimously predicted a 50bp increase following a similar move in April. Many had also expected a similar move being set up for the next decision on July 13, though the term forceful has been used to keep the option of 75bps on the table. This year's hikes are already the fastest under the current system of fixed meeting dates adopted in 2000, and the Bank hasn't hiked more than 50bps since moving a full percentage point in 1998.

Inflation is the dominant concern with the risk of a recession downplayed amid record low unemployment. Consumer prices climbed 6.8% in April from a year ago, the fastest since the Bank adopted inflation targets in 1991 and close to breaking a mark set in 1982.

The BOC had estimated inflation would average almost 6% in the first half of the year, triple its 2% objective, and on Wednesday said price gains have yet to peak and pressures are still broadening. 

"The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored," the Bank said.

While the Ukraine invasion is slowing global growth, domestic demand in Canada's major trade partner the U.S. remains robust, the Bank said.