Last Wednesday morning, the Bank of Canada (BoC) raised its key rate by 25 basis points to 0.75%, the first rate increase in seven years. Further to upbeat comments from BoC Governor Stephen Poloz and Senior Deputy Governor Carolyn Wilkins in recent weeks, this news came as little surprise to most market observers.
The rate hike capped off what was a major change in position from Bank of Canada officials: on March 28, Governor Poloz was still talking about rate cuts, and on June 12, Ms. Wilkins stated at a conference in Winnipeg that the BoC did not foresee any rate increases in the near future. In the comments that accompanied its decision, the BoC discussed the substantial growth in both the Canadian and global economies. According to our economists, revised U.S. Q2 growth played a major role in assessing global performance, which is experiencing its first generalized expansion in 10 years. Although he noted that inflation remained low, Mr. Poloz stated that this was only a temporary trend and that inflation would eventually return to the desired levels.
After surprisingly positive comments from Mr. Poloz at his press conference, the likelihood of a second rate increase by the end of the year has gone up to 70%. The Canadian dollar (CAD) also saw a substantial rise, gaining 1.8% over the week. Our economists are still calling from the USD/CAD pair to remain within the 1.25 to 1.35 range over the next 12 months, due among other reasons to potential key rate hikes in the United States, which have not yet been fully priced into market anticipations.
In the United States, U.S. Federal Reserve (Fed) Chair Janet Yellen wrapped up her two days of testimony to Congress on Thursday. Ms. Yellen stated that she was very optimistic about the economy’s potential and that she intended to continue with the program of monetary tightening underway in the coming months. However, the Fed Chair remains puzzled as to low U.S. inflation, which was confirmed when Consumer Price Index (CPI) data were released on Friday. Annual CPI variation came in at 1.6% for June, compared to 1.9% in May.
It will be interesting to follow the news surrounding the U.S. Congress over the next few weeks, as members will have to negotiate a replacement for the Affordable Care Act. The economic indicator calendar is rather sparse in North America this week, with the most important data point, Canadian inflation, to be released on Friday.