ECB preview and half-point hikes for CAD and NZD

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The global tightening cycle is in full swing, with interest rate hikes of half a point between and . The two central banks’ expectations of changes did not prevent the Canadian and New Zealand dollars from reacting strongly to these adjustments. The rose after the rate decision, while the plunged. Their diametrically opposed movements emphasize the importance of political orientation.

To the surprise of many investors, ourselves included, the Canadian dollar sold off before the rate decision, hitting a low about an hour before the Bank of Canada raised interest rates by 50 basis points. base for the first time in 22 years. It was the bank’s biggest move in more than two decades.

According to Governor Tiff Macklem:

“The economy can handle higher interest rates, and they are needed.”

Like many countries around the world, Canada is struggling with high inflation – the latest Consumer Price Report in February showed prices rising at their fastest pace in 30 years. Russia’s invasion of Ukraine pushed prices even higher in March. Although a half-point hike and an end to bond buying had been widely anticipated, Macklem’s predictions were skyrocketing.

He said: “We are ready to act as forcefully as necessary to achieve the inflation target”, adding that rates should return to the “neutral range of 2% and 3%”.

Canada should prepare for further tightening of 100 to 200 basis points this year.

The New Zealand dollar plunged despite a similar rate hike from the Reserve Bank. The RBNZ’s half-point move came as a surprise, as economists were expecting a quarter-point rise. However, according to the RBNZ, “the committee has agreed that its policy ‘the path of least regret’ is to raise the OCR further now, rather than later, to avoid rising inflation expectations.”

Even though the RBNZ said “it is appropriate to continue tightening monetary conditions”, investors interpreted today’s decision as a dovish move and a sign of central bank easing. He has raised interest rates for four straight meetings since October as inflation jumped to 5.9%.

Tomorrow, attention turns to the European Central Bank, which should not change its monetary policy. Although high inflation is also a problem in the Eurozone, growth is hampered by sanctions against Russia, supply chain issues and the shock of rising food and energy prices on consumers. The rise in long-term rates across Europe should help cool prices. Even if the ECB cannot raise rates this week, steps can be taken in this direction. The most important concerns its quantitative easing program. Earlier, the ECB said rates would not rise until asset purchases ended. The choice now is to end QE immediately or change guidance by suggesting that rates could rise as QE unwinds. We expect the ECB to raise interest rates this year, but that move may not come until late Q3 or early Q4, leaving the central bank far behind its peers.

The is trading strongly, especially against the Japanese yen ahead of Thursday’s retail sales report. With rising prices and wages, growth in consumer spending is expected to accelerate. The focus will be on core pricing – whether ex-auto spending and gas thrashing might prolong its gains. Even if it doesn’t, expectations of a half-point hike at the next FOMC meeting will remain intact.
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