Australia caused shockwaves in the market two days ago with its unexpected rate increase to 4.1%, and Canada has just followed in its footsteps. The Bank of Canada has raised its overnight rate to 4.75%, the highest it has been since 2001, catching many off guard.
This decision was only anticipated by one out of five economists in a Bloomberg survey, and odds stood at 50-50 in the markets.
In its statement, the Bank of Canada explained that demand in the economy was persistently higher than expected. Monetary policy was not restrictive enough to return supply and demand into equilibrium, and inflation could not sustainably hit its 2% target.
The bank stated that it would evaluate whether the evolution of excess demand, wage growth, inflation expectations, and corporate pricing behavior were consistent with achieving the inflation target. The bank’s commitment to restoring price stability for Canadians remained unshakable.
New Low For USD/CAD
The USD/CAD touched a new low of under 1.3350, displaying renewed bearish pressure. The Bank of Canada’s sudden interest rate hike has taken the market by surprise, but it could have positive implications for the Canadian economy.
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