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🏦🇨🇦Bank of Canada Desk Commentary

ING:

  • Inflation, which is already at 30-year highs, is also now expected to be higher in the near term than projected in January and the risk is that inflation expectations "could drift upwards". Consequently the Bank of Canada "expects interest rates will need to rise further" and this will be complemented by "quantitative tightening" via ending the reinvestment phase of its bond holdings.

  • The BoC did not provide specific guidance due to the uncertainty and economic implications from "the unprovoked invasion of Ukraine by Russia". We are looking for six rate hikes from the BoC in total this year (so five more to come). Canada is relatively insulated due to being a major commodity producer and having far less direct economic and financial linkages with Russia and Ukraine. Markets are currently pricing for another 5.5 hikes this year.

TD Securities:

  • The Bank of Canada's policy path isn't set in stone. The conflict between Russia and Ukraine is causing financial conditions to tighten. Should the spillover become more entrenched, further tightening may need to be reassessed.

  • Financial markets are improving today, with North American equity markets rebounding and yields rising. The Canada 2-year and 10-year yields are up 7 basis points and 4 basis points, to 1.4% and 1.75%, respectively. With the BoC confirming the likelihood of further rate hikes, the loonie is appreciating towards 79 U.S. cents.

  • With employment likely to show a strong rebound next week and inflation continuing to ratchet higher, the need for higher rates is self-evident.

CIBC:

  • With the CPI likely to run hotter than we had expected through the first half of the year, odds are that the Bank will deliver the remaining three quarter point hikes we had allocated for 2022 over the next three rate setting dates, rather than spread out through the year. We expect it to then pause at a 1.25% overnight rate to take stock of the direction for growth and inflation, and to let quantitative tightening operate as a tool for adjusting policy, before resuming rate hikes in 2023. Re:

  • Other than its deferral of a decision on quantitative tightening, the Bank didn't give markets much in the way of real news, as a rate hike was widely expected, and its description of the growth and inflation picture not too surprising for anyone following the data in recent weeks. Yields further out the curve have fallen in the days since the onset of war on a flight to safety bid impacting the global bond market, but are unlikely to sustain these lower rates in the face of the tightening ahead from both the Bank of Canada and the Fed. Indeed, the lower starting point for bond yields


Decision Scenarios Via TD Securities

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