As expected by many market players, the Bank of Canada raised its benchmark interest rate on Wednesday by half a percentage point to 1%, the first increase of 0.5% in 22 years.
The move was made during a period of significant rising inflation that drove up food, gas and even housing prices. The central bank of Canada in a statement stated that, “rising prices of oil, natural gas and other commodities are further fueling inflation around the world. Supply disruptions due to the Russo-Ukrainian war also exacerbated ongoing supply constraints and burdened trade activity. These factors are the main drivers pushing the BOC to raise its inflation projection ”.
Not only that, the BoC also announced it would end reinvestment and begin quantitative tightening, effective April 25th. The head of capital market economics at the Bank of Nova Scotia, Derek Holt, said Wednesday’s rate announcement was largely to be expected.
On Tuesday, Holt said the market had already raised its forecast for a half -percentage point increase. Major banks, the Big Six, have also forecast a half-percentage point increase ahead of Wednesday's announcement.
Analysts predict that interest rates will at least be raised to 2.5% by the end of 2022. Holt added that so far he does not expect any material impact on bonds, equities or the Canadian dollar. For the record, yields for 10 -year Canadian government bonds reached 2.69% on Monday, the highest in nearly eight years.
This is because the market has been expecting rate hikes in the future. The Canadian currency strengthened slightly against the US dollar with USD/CAD trading flat at 1.2643 following the report’s release.
