The Bank of Canada raised interest rates 25 basis points to 4.75 per cent on June 7, surprising some economists. Read on for their thoughts.
“We thought the BoC might wait until July to accumulate a few more data points and refresh its forecasts, but consistent with a proactive approach throughout this tightening cycle, Governing Council surprised the consensus with a 25 basis rate hike.
“We also believe that concerns regarding its reputation may have played a role in tilting the balance toward a hike this month. The BoC has been under intense scrutiny and criticism for having left interest rates too low for too long during the recovery from the pandemic and being partly responsible for the current high inflation. By acting aggressively, the bank is likely trying to restore its credibility as an inflation fighter and influence inflation expectations.
“The question becomes: is policy sufficiently restrictive now? Well, the BoC’s assessment that excess demand is more persistent than expected and inflation is more likely to “get stuck” above two per cent doesn’t suggest that a single 25 basis point hike is all that is needed to achieve a return to balance. That tends to be the assessment of financial markets as OIS pricing strongly points to another increase this year.
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