| If there were any doubt that the Bank of Canada wanted inflation to fall to 2%, it would be obliterated today. In a relatively surprising move, the Bank hiked the overnight policy rate by 25 bps to 4.75%, and an equivalent hike will follow in the prime rate. Fixed mortgage rates had already leaped higher even before today’s move as market-determined bond yields have risen in the wake of the US debt-ceiling debacle. Now variable mortgage rates will increase as well. The central bank is determined to eliminate the excess demand in the economy.
“Monetary policy was not sufficiently restrictive to bring supply and demand into balance and return inflation sustainably to the 2% target,” the bank said, citing an “accumulation of evidence” that includes stronger-than-expected first-quarter output growth, an uptick in inflation and a rebound in housing-market activity.
I had thought that the Bank would want to see the May employment data and the next read on inflation before they resumed tightening, but with the substantial May numbers in the housing market, the Governing Council jumped the gun. |
