ICYMI: Bank of Canada delivers jolt with 100 basis point interest rate hike Canada economy inflation interestratehike
that would have startled Macklem and his deputies when staff economists presented it. Here are the highlights:Article contentThe central bank sees year-over-year increases in the consumer price index averaging eight per cent in the third quarter, and ending the year 7.5 per cent higher than at the end of 2021, compared with a previous estimate of 4.5 per cent. The Bank of Canada now assumes the consumer price index will still be above three per cent at the end of 2023 .
Macklem and his deputies had an incentive to outdo the Fed. Typically, higher oil prices cause the value of the Canadian dollar to rise. But for whatever reason, the exchange rate has been roughly stable even as international oil prices surged above US$100 per barrel. That has contributed to inflation because a weaker currency makes imports more expensive.
An important factor in determining exchange rates is interest-rate differentials between various central banks. By going bigger than the Fed and other major central banks, the Bank of Canada will jolt traders into rethinking the values they assign to various currencies. The loonie should get a lift, which would lean against inflation — at least until the next Fed policy meeting, when chair Jerome Powell will have to confront his own inflation threat.
Ahead of the Bank of Canada’s announcement, markets learned the U.S. consumer price index increased 9.1 per cent in June from a year earlier. “The Fed will probably do 100 now,” O’Gorman said. “It’s the new arms race.” The Canadian dollar traded as high as about 77.3 cents against the U.S. dollar, compared with about 77.8 cents ahead of the interest-rate increase. The exchange rate drifted back towards 77 cents as the day wore on.“A sharp slowdown in the housing market is underway,” the Bank of Canada said in its new quarterly economic outlook.is perhaps the industry most sensitive to interest rates.
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