The unexpected monetary jolt illustrates the extent to which officials are spooked by soaring inflation; it was the largest increase since 1998.
| The Bank of Canada hiked interest rates by a full percentage point, a surprise move that supercharges efforts to withdraw stimulus amid fears four-decade-high inflation is becoming entrenched.
The Canadian dollar soared on the move, rising more than 0.5 per cent to C$1.2952 per US dollar at 12.14pm in Toronto trading. Yields on two-year sovereign bonds jumped about 10 basis to 3.31 per cent.Investors ramped up bets that front-loading also means rates will plateau higher than previously expected. Overnight swaps are suggesting Macklem will hike the benchmark to 3.75 per cent by the end of this year, up from 3.5 per cent before the decision.
“This argues for getting our policy rate quickly to the top end,” Macklem said, adding that he believes that’s “slightly” above the neutral range, which the central bank estimates at between 2 per cent and 3 per cent. Neutral is a policy setting where borrowing costs are neither stimulative nor constrictive.
Macklem is also one of the more hawkish among peers, in a world where a number of central banks are pivoting to more aggressive hiking paths as inflation pressures continue to surprise. In the accompanying monetary policy report, Bank of Canada officials again raised their near-term forecasts for inflation, seeing price pressures running at around 8 per cent in the middle quarters of this year. Inflation will drop to 7.5 per cent by the end of this year, and won’t return to the 2 per cent target until the end of 2024.policymakers also slashed their outlook for the Canadian economy. They now see gross domestic product expanding 3.5 per cent this year and 1.
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