Governor Tiff Macklem raised the central bank’s policy rate to 2.5% in a decision announced Wednesday in Ottawa that warned of more hikes to come. The 100-basis-point move is the largest increase since 1998. Markets and economists were anticipating 75 basis points.
The unexpected monetary jolt illustrates the extent to which officials are spooked by soaring inflation, electing to take decisive action even at the risk of causing severe economic pain. They cited worries that persistent inflation creates a vicious cycle of wage gains and price increases that is difficult to bring under control.
“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates,” officials said in the policy statement.
The Canadian dollar soared on the move, rising more than 0.5% to C$1.2952 per U.S. dollar at 12:14 p.m. in Toronto trading. Yields on two-year sovereign bonds jumped about 10 basis to 3.31%.
Investors ramped up bets that front-loading also means rates will plateau higher than previously expected. Overnight swaps are suggesting Macklem will hike the benchmark to 3.75% by the end of this year, up from 3.5% before the decision.
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