Well, who said that central banks have lost their ability to surprise. This morning, the Bank of Canada was widely expected to deliver another three-quarters of a point rate hike, but Bank officials blinked and we ended up with only a half point increase to 3.75%. Considering how much emphasis has been placed on the need to remain hawkish, reinforced by comments regarding Canadian dollar weakness countering efforts to control inflation, this decision is way outside what the markets were looking for. Prior to the announcement, the Loonie had actually rallied to 74 US cents; but within minutes, it had reversed all the way back to the 73.30 cent area. 

 

 

The accompanying policy statement didn’t really explain the Bank’s pivot. For example, it stated that a strong US dollar was continuing to add to inflationary pressures and that broad price pressures elevated the risk of entrenched expectations. The Bank was clear that rates will need to rise further, leaving in place expectations for another hike in December, but it has lowered its growth estimates. Where it saw growth of 1-2% next year, it now forecasts only a 0.9% lift in economic output – rising to only 2% in 2024. The headline that has grabbed attention is that the Bank believes that a technical recession is just as likely as a slowdown in growth. I would suggest that the market is already pretty much in the recession camp; so today’s pivot is a first sign that the Bank doesn’t want it’s next statement to be “a deep recession is just as likely as a technical recession”.

 

The press conference this morning will be closely watched for further explanation behind the surprise move. Having said all that, a 0.5% increase in rates is nothing to sneeze at if households were feeling the strain from higher borrowing costs before, those challenges have still increased today.

 

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