It’s a rate hike, fellas! Loonie bulls charged upon seeing a hawkish decision by the Bank of Canada, followed by upbeat statements during the presser.
- BOC hiked interest rates from 0.50% to 0.75% as expected
- BOC: Future adjustments will be guided by incoming data
- BOC: Canadian economy robust, fueled by consumer spending
- BOC: Factors behind soft inflation are temporary, adjustment to low oil prices complete
- BOC raised GDP forecast from 2.6% to 2.8% for this year
- Fed head Yellen: Inflation still a key factor in their deliberations
- Yellen: Gains in employment will put upward pressure on wages
BOC delivers hawkish hike
It looks like the Fed ain’t the only major central bank in rate hike mode on this side of the world! The BOC decided to increase interest rates by 0.25% to 0.75% on account of robust growth and a foreseen pickup in inflation.
In their official statement, policymakers noted that growth has been fueled by strong consumer spending and that the economy has completed its adjustment to low oil prices. No wonder the oil-related Loonie seems to be immune to Black Crack declines in the past few weeks!
BOC officials also acknowledged that inflationary pressures have eased recently but emphasized that “the factors behind soft inflation appear to be mostly temporary.” They even went on to predict that annual inflation could rebound and hit the 2% target by mid-2018.
During the presser, BOC head honcho Poloz was asked if the central bank is planning on hiking interest rates again but he refrained from making any hard forecasts. Instead, he reiterated that the country’s oil price troubles are behind them and that the government’s infrastructure program is helping close the output gap.
Relatively balanced statement from Yellen
Fed Chairperson Yellen’s testimony seems to have dampened hopes of another rate hike as she weighed the pros and cons of doing so.
During her testimony, Yellen gave a roughly balanced assessment and outlook for the U.S. economy, citing that a gradual pace of rate increases is still appropriate. She did acknowledge that growth picked up in Q2 due to stronger household spending and business investment but warned that inflation remains a concern.
Yellen added that the recent dip in inflation is likely due to temporary factors – something that previous Fed statements have already indicated. However, she didn’t express much eagerness to tighten either, saying that it’s prudent to make “some adjustments” to rates but that they don’t need to hike “all that much further.”
When it comes to the balance sheet runoff, she hinted that they intend to start their reduction plan this year. During the Q&A, she clarified that they never discussed buying student or municipal debt and that they plan on focusing primarily on Treasuries.
Major Market Mover(s):
After a bit of pre-statement profit-taking, the Loonie surged across the board when the BOC signed, sealed, and delivered an actual rate hike.
USD/CAD tumbled from 1.2934 to a low of 1.2726, CAD/JPY popped up from 87.78 to a high of 89.34, EUR/CAD slipped to the 1.4550 area, and AUD/CAD dropped from .9925 to a low of .9736.
Watch Out For:
- 2:00 am GMT: Australia MI inflation expectations (3.6% previous)
- Tentative: Chinese trade balance (273B CNY expected, 282B CNY previous)