Following a 0.75 percentage point interest rate rise from the US Federal Reserve yesterday (its largest since 1994), Bay street is now putting the probability of an identical hike coming out of the Bank of Canada’s July decision at 80%, according to Bloomberg.
Catch up: Just last week, traders put the probability of a move that size, which would bring the country’s benchmark interest rate to 2.25%, at about 50%. So, what happened?
- Expectations around how aggressively Canada’s central bank will move to cool prices are changing (fast), as the US inflation rate hit 8.6%, and economists expect Canadian prices to soar past the last reported 6.8% annual inflation rate.
If the market has already priced in a super-sized rate hike and inflation numbers later this month don’t look good, “it will be hard for the Bank of Canada to pass up the opportunity to more forcefully hike rates,” BMO economist Benjamin Reitzes told Bloomberg.
Higher borrowing costs have started to take their toll.
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Home prices declined for the second straight month as of yesterday, including in the country’s hottest markets, as it becomes increasingly harder to get a mortgage.
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Layoffs have started across the country, with Wealthsimple laying off 13% of its staff, Shopify-backed Swyft 30%, as well as real estate brokers Compass and Redfin.
- Canadian markets slid into correction territory as the TSX / S&P Composite Index fell ~5% in the last week alone, partially dragged down by rate hike fears.
Yes, but: Central banks can impose higher interest rates to take demand out of the economy (by making debt more expensive), but that won’t end the war in Ukraine, lift China’s lockdowns, or increase energy production—all factors also driving up prices.
Bottom line: The economy is getting shakier by the day, and policymakers are grasping for whatever tools they have to get things under control… we’ll just have to see if it works.