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.”
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.