BoC: Central bank to raise key interest rate to 4.25% – CIBC

The Bank of Canada raised the key interest rate by 50 basis points to 3.75% surprising market participants that expected a larger increase. Analysts at CIBC still expected the rate to peak at 4.25%, despite the “slight dabbing of the brakes” compared to previous hikes. 

Key Quotes: 

“The Bank of Canada hiked interest rates by a further 50bp to take the overnight rate to 3.75% today, although that move reflected a slight dabbing of the brakes relative to the prior pace of rate increases and what was expected by the market heading into today's decision (75bp was almost fully priced in). The press conference put some emphasis on avoiding the damaging consequences of an overshoot and the need to slow rate increases in the face of an economy that has started to slow in response to past increases.”

“While the Bank of Canada slightly under-delivered today in terms of the size of rate hike delivered, its downgraded view of potential growth and continued commitment that interest rates "will" need to rise further doesn't suggest to us that the peak in interest rates will be any lower than we were expecting heading into today's announcement.”

“The press conference opening statement suggested that we are getting closer to the end of the hiking cycle and that, barring a large surprise, steps of 75bps are now behind us. This is consistent with our forecast of a peak rate of 4.25%, and that rates will have to stay at that level at least through the end of 2023 to help bring inflation back down to target.”