The Bank of Canada (BoC) raised the overnight rate by 25 basis points (bps) today to 5.0%. The increase was expected by financial markets as excess demand and core inflation are proving more persistent than hoped for. Therefore, Canadians should expect inflation to remain higher for longer than anticipated before it starts moving towards the target rate of 2%.

CIBC Capital Markets confirms that today's BoC statement suggests risks are skewed towards another hike after the summer. However, the forecast for GDP growth is not currently as low as it was in the past. As of today, GDP growth is likely to be 1.5% in the third quarter and full year growth is anticipated to be 1.8% for 2023 and 1.2% for 2024, both above previous expectations. Because of this, CIBC Capital Markets feels there is scope for the economy to underperform the Bank's new GDP forecast and for the overnight rate to stay on hold throughout the remainder of the year.

As the BoC interest rate hike was expected, it seems that today’s US CPI inflation data is having a greater impact on Canadian equities than the rate increase. Craig Jerusalim, Senior Portfolio Manager, Equities, at CIBC Asset Management, says “resilient Canadian equities are yet to feel the full bite of the prior nine rate hikes, but equities won’t be able to ignore the tighter financial conditions indefinitely.”

Mr. Jerusalim confirms “the Canadian economy is two times more rate sensitive than our neighbors to the south.” This is likely because of shorter duration mortgages in Canada and because the housing market makes up a large overall percentage of Canadian GDP. It’s also why housing risk remains front and centre for the BoC. “Today’s move will likely weigh on expensive growth companies with long duration cash flows and highly levered sectors such as utilities and real estate.”