Good morning,

As largely expected, the Bank of Canada (BoC) lifted rates for the second time this year as the overnight rate increased by 50 bps to 0.75%. This marks the first time since May 2000 that the BoC hikes rates by such magnitude in a single hike. Recent economic data would argue in favor of a faster removal of monetary accommodation. The labor market in particular was cited in today’s announcement:

“Labor markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices.”

Employment is now running at 442K jobs above pre-pandemic levels, and the unemployment has dropped to its lowest level since the 1970s. Most businesses continue to report expectations of price pressures on both output and inputs, as results from the BoC’s most recent Business Outlook Survey (BOS) revealed businesses expressing difficulty meeting demand due to worsening supply/labor frictions, which they expect to persist until at least 2023.

Adding to the BoC’s case, Canada’s GDP extended its winning streak in the month of January, increasing 0.2% m/m (3.5% y/y), with preliminary estimates looking for 0.8% m/m growth in the month of February despite an early 2022 Omicron shock. Canada’s strong economic growth in the fourth quarter of 2021 was previously cited in the BoC’s early-March policy hike statement as confirmation that the economic slack experienced in the early phases of the pandemic has already been absorbed. In today’s announcement and accompanying Monetary Policy Report (MPR), the BoC announced an upwards revision to its 2022 GDP growth forecast (4.2% vs 4.0% previously), with growth expected to pick up significantly in the second quarter to 6% q/q. That being said, the bank revised its 2023 growth forecast lower to 3.2% vs 3.5% previously, with the expectation of continued slowing into 2024 (2.2%).

Inflation expectations were revised higher. The BoC is forecasting inflation to average just under 6% in the first half of 2022, as the usual culprits (energy, food, and supply disruptions) continue to put upward pressure on prices. Inflation is then expected to move lower towards 2.5% by the second half of 2023 and towards the 2% target by 2024.

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Have a great day,

Devin