The Bank of Canada (BOC) hiked its policy rate by 100 basis points (bps) to 2.5% in July, compared to the market expectation for a rate increase of 75 bps. 

In its policy statement, the BOC acknowledged that it has underestimated inflation since the spring of last year mainly because of global factors.

Market reaction

The USD/CAD pair fell sharply with the initial reaction and was last seen losing 0.4% on a daily basis at 1.2970.

Key takeaways as summarized by Reuters

"Higher commodity prices, increased supply shortages and rising shipping costs explain about two-thirds of missed inflation."

"About a quarter of the inflation forecast miss came from underestimating domestic factors, mostly housing costs."

"In past, the strong correlation between higher oil prices and an appreciation of the dollar helped offset energy impact on inflation, but recently correlation is not holding."

"Wanted to 'front-load' path to higher interest rates amid excess demand and high, broadening and persistent inflation."

"Inflation is higher and more persistent than had been expected in April forecasts and will likely remain around 8% in the next few months."

"Interest rates will need to rise further and the pace will be guided by the bank's assessment of the economy and inflation."

"Quantitative tightening continues and is complementing interest rate increases."

"Governing council is resolute in commitment to price stability and will continue to take action to achieve the 2% inflation target."