Bank Of Canada Hikes Rates, Loonie Surges To Fresh Two-Year High

Ok, heads up, the BoC just hiked.

This wasn’t entirely unexpected given the hot economic data that’s been coming in fast and furious over the past couple of months, but it is extremely notable coming after the July hike.

Here’s the reaction in the loonie which surged to a fresh two-year high:

Loonie

Loonie2

This time around, specs were on the right side, having been burned horribly earlier this year:

CAD

And here’s the breakdown from Bloomberg:

Bank of Canada raises overnight rate target to 1%, est. 0.75%

  • BOC: “Removal of some of the considerable monetary policy stimulus in place is warranted” given stronger than expected economic performance
  • Bank of Canada: “Future monetary policy decisions are not predetermined” and will be guided by economic data and financial-market developments as they “inform the outlook for inflation”
    • “close attention will be paid to the sensitivity of the economy to higher interest rates” given elevated household indebtedness
    • Bank will give particular focus to evolution of economy’s potential and labour market conditions
    • Inflation remains below 2% but has evolved “largely as expected” since July MPR
    • Excess capacity remains in labour market, wage and price pressures more subdued than historical relationships suggest
    • “Geopolitical risks and uncertainties around international trade and fiscal policies remain”
  • BOC: Growth in Canada is becoming “more broadly-based and self-sustaining”
  • Bank of Canada expects moderation of pace of economic growth in 2H 2017, but GDP level higher than expected in July MPR
    • Consumer spending remains robust, aided by solid employment and income growth
    • Widespread strength in business investment and exports; housing sector cooling in response to recent tax and finance policies
    • “Global economic expansion is becoming more synchronous”

You’re reminded that while the timing was up for debate, this was largely inevitable.

Simply put, they’re going to have to keep hiking. Here’s how BofAML explained the situation late last week:

The Bank of Canada has to embark on a hiking cycle. The Canadian economy is booming yet the overnight rate is well below any reasonable measure of neutral rate. And the reference rate is already increasing, as the US Federal Reserve is on a (gradual) hiking cycle itself. In this context, an inflation targeting central bank such as the BoC has almost no other option than to embark on a hiking cycle to keep inflation on target. But we expect a gradual hiking cycle, with the BoC hiking one more time this year and three more times in 2018, with the next hike on October 2017. This is a change with respect to our previous call of no more hikes this year. We now expect the overnight rate target to be at 1% by end 2017 and at 1.75% by end 2018 (vs 0.75% and 1.5% before). The economy is growing so fast that the risk to our new baseline is that the Bank of Canada decides to front load the hiking cycle, starting in September.

If you don’t recall the context for this, we would encourage you to review some our previous posts here, but suffice to say things are going well despite jitters about a housing bubble and oil prices and lest you should forget, the BoC’s July hike was salt in the wounds of those who got caught up in a truly terrible bet against the loonie which, a recent period of softness notwithstanding, has rallied hard since the spec CAD short began to unwind in June. 

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