Morning Market Brief: Thursday, June 8, 2023

The Bank of Canada surprises markets?

In an unexpected move, the Bank of Canada (BoC) returned to hiking its key interest rate, with inflation running at elevated levels and Canada’s economy remaining relatively robust. While a Bloomberg survey indicated economists did not expect the move at this meeting, many anticipated more rate increases from Canada’s central bank after Canada’s economy posted stronger-than-expected growth in the first quarter. ?

• The BoC raised its benchmark overnight interest rate by 25 basis points to 4.75%, the highest level since 2001. The increase followed two consecutive rate holds as the BoC expected inflation and Canada’s economy to moderate.
• Excess demand continues to drive high inflation and economic growth. Despite tighter financial conditions, demand remained strong and outstripped supply, helping to keep prices elevated.
• The potential for inflation to remain sticky at levels well above the BoC’s 2% target concerned officials. The BoC believes this rate increase was warranted to help bring supply and demand back into balance, which could drive inflation down and slow an overheated economy.
• What comes next from the BoC is unknown. The BoC provided little direction on whether it has returned to its rate-hike path. It did note it would carefully monitor the impact of tighter monetary policy on Canada’s economy as it makes upcoming interest rate decisions.

Canada’s central bank reiterated its commitment to restoring price stability in Canada, which could result in more rate hikes. It is important to prepare your finances for relatively higher interest rates. Now is the time to prepare your portfolios for the possibility of more interest rate increases by the BoC. Rate increases will likely lift bond yields, put pressure on bond prices, and create volatility in equity markets.

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