The Bank of Canada (BoC) on Wednesday, as expected, raise the key interest rate by 25 bp. Analysts at RBC Capital Markets point out that at this early stage, they don’t think geopolitical developments preclude a follow-up hike in April, nor do they argue for the more aggressive tightening path.
Key Quotes:
“The BoC lifted its policy rate for the first time since 2018, having kept it near zero for nearly two years of the pandemic. The Russian invasion of Ukraine was noted as a major new source of uncertainty, but after a close call not to hike in January, there appeared to be a low bar to raise rates today and recent data easily cleared it.”
“The BoC will have to weigh additional inflationary pressure brought on by that conflict against two-way domestic impacts (increased revenue for commodity producers, higher prices for consumers) and concerns about the global economic outlook. Central banks would normally look through geopolitically-driven commodity price pressures, but with inflation already so far above target the BoC has said it is more concerned about upside risks to inflation than downside.”
“At this early stage, we don’t think geopolitical developments preclude a follow-up hike in April, nor do they argue for the more aggressive tightening path that markets continue to price.”
“Consistent with previous guidance, the BoC said it will “be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink.” We’ve yet to see a topic for Governor Macklem’s economic progress report tomorrow but think he could use the speech to provide more details on what QT will look like—whether the BoC plans to gradually phase out reinvestment or immediately shift to a smaller share of primary market purchases. Those detail could be followed by an actual QT announcement as soon as April’s meeting depending on how financial conditions evolve in the interim.”
“We’ll of course also be looking for any comments on how the Russia-Ukraine conflict will impact Canada’s economy and the path for monetary policy.”