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The Bank of Canada raised the key rate from 0.25% to 0.5%, the first increase since October 2018 and the start of a cycle of hikes intended to curb high inflation.

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Below is a roundup of economists’ views on the latest move by Gov. Tiff Macklem and his deputies:

Royce Mendes, head of macro strategy at Desjardins

“Today’s rate hike is the first step in the most significant tightening cycle in decades. Monetary policymakers are trying to rein in already scorching inflation instead of their usual tact of easing price pressures before they fully emerge.

“The Bank of Canada acknowledged additional tailwinds to inflation from the conflict in Ukraine and headwinds to global growth, neither of which were factored into its January Monetary Policy Report.”

James Orlando, Senior Economist at the Toronto-Dominion Bank

“The Bank of Canada’s political trajectory is not set in stone. The Russian-Ukrainian conflict hardens financial conditions. Should the fallout become more entrenched, further crunch may need to be reassessed. »

Stephen Brown, Senior Economist at Capital Economics

“While the Bank noted that the war in Ukraine will have ‘negative impacts on confidence’ and that ‘further supply disruptions could weigh on global growth’, it also pointed out that due to the impact on energy and food prices, “Canadian inflation is now expected to be higher in the near term than expected in January” and that “this persistent high inflation increases the risk that inflation expectations will rise long term can drift upwards”.

Josh Nye, Senior Economist at Royal Bank of Canada

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“The Bank of Canada will have to weigh the additional inflationary pressures caused by this conflict against the two-way domestic impacts (increased incomes for commodity producers, higher prices for consumers) and concerns about the global economic outlook. Central banks would normally look beyond geopolitically driven commodity price pressures, but with inflation already well above target, the Bank of Canada said it was more concerned about downside risks. upside for inflation than downside risks. Indeed, he said that “persistently high inflation increases the risk that longer-term inflation expectations could drift upwards.” In addition to inflation expectations, the bank will keep an eye on financial conditions. Government bond yields fell amid growing concerns and rising risk aversion, but corporate credit spreads widened. Other financial channels have been fairly stable – the Canadian dollar has been in a tight range over the past month and the TSX has held up well against other equity markets. At this early stage, we don’t think geopolitical developments preclude a follow-up rally in April, nor do they argue for the more aggressive tightening path that markets continue to price.

Stephen Tapp, Chief Economist at the Canadian Chamber of Commerce

“Inflationary pressures are building, medium-term inflation expectations are rising and tight labor markets are leading to increased wage pressures. Across a range of sectors, Canadian companies are grappling with rising costs, and many say they will eventually have to raise prices. Fortunately, the economic recovery now seems sufficiently entrenched to be able to withstand the steady tightening of financial conditions necessary over the next few years to control inflation.

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Tu Nguyen, Economist at RSM Canada

“What higher rates can do is help anchor long-term inflation expectations, which have started to drift away from the 2% target. Bank actions may also play a role in cooling the overheated housing market which has broken record after record. As borrowing became expensive, households would think twice and be reluctant to buy.

Kelli Bissett-Tom, director at Fitch Ratings

“While the Canadian economy is booming – with GDP growth of 4.9% in 2021 according to preliminary estimates from StatCan, robust consumption, high household savings – and businesses in the labor market with 6 .5% unemployment in January, the risks of wage pressure and long-term price expectations are quite significant. The start of the higher interest rate trajectory and the reduction in the investable balance sheet that we expect to begin in 2022 will remove fuel from the booming Canadian housing market, although supply and demand constraints will skilled immigration remain long-term structural characteristics.

Benjamin Reitzes, rate strategist at Bank of Montreal

“Assuming the economy maintains its forward trajectory and inflation remains high (there is little doubt in the short term), the BoC ‘expects interest rates to have to rise further’. That is consistent with the rate hike trajectory narrative and our expectation for another 25 basis point rate hike at the April meeting.In the meantime, there has been no change on the balance sheet front , although policymakers are considering ending reinvestment and QT. An April announcement on that front is possible, and we may get more color from Governor Macklem’s speech and press conference tomorrow.

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Charles St-Arnaud, Chief Economist at Alberta Centra

“Overall, today’s decision by the Bank of Canada confirms our view that we should see further rate hikes at the April and June meetings, bringing the policy rate to 1 .00% by summer and ending the year at 1.25%. On the balance sheet, the BoC expressed a preference for using rate hikes rather than reducing the size of the balance sheet (QT) to remove policy stimulus. With that in mind, we wouldn’t be surprised if a decision on ending the reinvestment phase of QE only comes after one or two more rate hikes.

Taylor Schleich, Warren Lovely, Jocelyn Paquet, strategists at the National Bank of Canada

“Despite the uncertainty created by the Russian invasion of Ukraine, there was never really any doubt that today we would get the first rate hike from the Bank of Canada since 2018. Wasn’t the “accommodating hike” some were expecting. With the Bank citing higher than expected growth and upside risks to inflation, it looks like a steady dose of normalization continues to be in the cards. While the Ukraine crisis remains fluid and poses clear risks to the outlook, it looks like we are on track for a second straight rise in April. Where the outlook gets a little gloomier is later in the year, should the crisis in Europe rage and financial conditions continue to deteriorate. Against this backdrop, risks to our forecast of five rate hikes for 2022 could be biased to the downside, but we believe there are still at least a few “easy” rate hikes ahead anyway. »

Darcy Briggs, senior vice president at Franklin Templeton

“You’re going to see a lot more volatility (in the bond market) because there’s an increased level of geopolitical uncertainty and we still have a pandemic going on.”

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