The Bank of Canada (BoC) raised the overnight rate by 25 basis points (bps) to 4.75% today as it continues quantitative tightening.
 

The decision to raise interest rates again is an effort to help bring supply and demand back into balance and return inflation to the target rate of 2%. The BoC stated that monetary policy was not sufficiently restrictive and quantitative tightening complements a restrictive monetary policy as it can help normalize the BoC’s balance sheet—and in turn the rate of inflation. Although the BoC notes inflation is coming down globally when compared to a year ago (largely due to lower energy prices), underlying inflation remains high.
 

“The Bank of Canada’s decision to raise rates was a surprise to investors”, says Giuseppe Pietrantonio, Associate Client Portfolio Manager, Multi-Asset and Currency Management at CIBC Asset Management. “But the re-acceleration of inflation and economic growth have forced the BoC to continue raising rates.”
 

Although surprising, CIBC Capital Markets confirms the interest rate increase is justified because of the recent readings on core inflation, the tightness in the labour market, and persistent excess demand. The unexpected strength in consumption growth and interest-sensitive areas of the economy are also key factors. They go on to note that should inflation get stuck above the 2% target, additional rate hikes could continue if signs of economic slack opening up aren't clear in forthcoming data.
 

Interest-sensitive financial markets have moved sharply, as seen in the increase in Canadian bond yields and the appreciation of the CAD versus the USD. Further market movements will be largely determined by the extent and length of this tightening cycle. If the BoC continues to raise rates or decides to keep rates elevated for an extended period of time, equity markets are expected to face challenges in the short term.
 

When deciding if additional interest rate hikes are required to help lower inflation, the BoC will continue to evaluate whether the evolution of excess demand, wage growth and corporate pricing behaviours are consistent with achieving the target inflation rate. The Bank remains committed to restoring price stability for Canadians.
 

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