The Bank of Canada (BoC) lifted interest rates by 50 bps from 1.0% to 1.50% on Wednesday, a move that had been expected by most analysts, with a minority calling for a larger 75 bps hike. 

According to the BoC's latest statement on monetary policy, the bank is prepared to "act more forcefully if needed" to achieve its 2.0% inflation target, in light of the risk of elevated inflation becoming more entrenched having risen. Moreover, the BoC said that inflation will likely move even higher in the near term before beginning to ease. The bank said it continues to judge that interest rates will need to rise further. 

Regarding the economy, the BoC said that Canadian economic activity is strong and the economy is clearly operating in excess demand. Q2 growth is expected to be solid given robust consumer spending, as well as given expectations of strengthening exports. Moreover, activity in the Canadian housing market is moderating from exceptionally high levels. 

The BoC said it plans to continue its policy of quantitative tightening and said that the Ukraine war has increased uncertainty and is putting further upwards pressure on prices for energy and agricultural commodities.  

Market Reaction

The loonie saw some kneejerk weakness given the fact that money markets had been pricing in some probability of a more hawkish 75 bps rate hike. USD/CAD was last trading in the 1.2640s, about 20 pips higher versus pre-BoC announcement levels, though still flat on the day.