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Bank of Canada surprises with 100bps hike, gold priced in CAD sees volatile swings

Kitco News

(Kitco News) The Bank of Canada caught the markets off guard by raising rates 100 basis points, taking its key interest rate to 2.5%. This is the biggest one-time hike since 1998.

The reason for such an aggressive move was stubbornly high inflation.

"Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months," Canada’s central bank said Wednesday.

Markets expected a 75-basis-point hike in July after the Bank raised rates by 50 basis points in June. 

This is the fourth consecutive rate increase by the bank since March, which puts it ahead of its peers and demonstrates its strong commitment to getting 40-year high inflation under control. 

In its decision, the Bank of Canada noted that inflation is not just due to external factors like the war in Ukraine.

"Domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%," the bank said. "Also, surveys indicate more consumers and businesses are expecting inflation to be higher for longer, raising the risk that elevated inflation becomes entrenched in price- and wage-setting."

In its updated economic projections, the bank raised its near-term inflation forecasts, projecting price pressures to run at 8% in the third quarter of this year. Inflation is seen at 7.5% in the fourth quarter, up from the earlier estimate of 4.5%. By the end of next year, the bank expects inflation to decelerate to 2.4% and 2% by 2024.

Global economic growth is estimated to slow to 3.5% in 2022 and 2% in 2023. The bank also slashed its forecasts for Canada, expecting the economy to grow at 3.5% this year and 1.8% in 2023, down from 4.2% and 3.2%, respectively.

"Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures," the bank said

The Bank of Canada described Wednesday's monetary policy move as front-loading rate hikes to try and squash the perception of high inflation persisting for longer.

"The increase of this magnitude is very unusual. Inflation is too high, and more people are getting more worried that high inflation is here to stay. The Canadian economy is overheated. There are shortages of workers and shortages of goods and services. Demand needs to ease. We are raising rates quickly to prevent inflation from becoming entrenched," Bank of Canada Governor Tiff Macklem told reporters. 

On top of that, the bank warned that interest rates would have to rise even further to achieve its price stability goals. "The Governing Council is resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target," the bank said.

Following the announcement, gold priced in Canadian dollars dropped back towards 8-month lows, last trading at CAD$2,240.42 an ounce, down 0.33% on the day.

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