Hawkish Bank of Canada speech puts half-point rate hike in play

Bloomberg

Canada’s 10-year yield rises to the highest since 2018 as a top Bank of Canada official said household finances are in good shape and that monetary policymakers are prepared to “act forcefully” to quell inflation.
Deputy Governor Sharon Kozicki reiterated the central bank’s “unwavering commitment” to wrestle inflation back to the 2% target and said more aggressive action — including shrinking holdings of government bonds, known as quantitative tightening — will be discussed. She acknowledged that while rising borrowing costs impact Canadians differently, higher price pressures are “especially painful” for low income individuals.
“I expect the pace and magnitude of interest rate increases and the start of QT to be active parts of our deliberations at our next decision in April,” Kozicki said. She also warned that Russia’s war in Ukraine is driving inflation higher than expected in the bank’s most recent quarterly forecasts.
Her remarks, delivered by video conference to the Federal Reserve Bank of San Francisco, come three weeks after the Bank of Canada raised its policy interest rate to 0.5%, from the emergency low of 0.25% set after Covid-19 hit North America.
Before the speech, markets were pricing in at least nine more 25-basis-point hikes over the next year. Traders ramped up those bets, with her comments boosting expectations for a bigger move next month.
Canada’s yield surge mirrored moves in the Treasury market, where traders are pricing in even more hikes for the Federal Reserve, with several policymakers at the US central bank saying a 50-point hike is on the table.
Kozicki’s speech shows the Bank of Canada is prepared to act swiftly and strongly to quell inflationary pressures, which hit a three-decade high of 5.7% in January from a year earlier. She also mentioned the bank’s concerns about inflation expectations drifting upward given the persistently high price gains.
Her remarks emphasized that differences in households’ wealth, debt and incomes can amplify economic shocks and impact decisions about fiscal and monetary responses. Still, Kozicki said that while debt risks persist, the bank judges that “households on average appear to be in better financial shape now than at the start of our 2017–18 tightening cycle.”
While Kozicki said high levels of indebtedness remain an important domestic vulnerability, a strong labor market and substantial savings accumulated during the pandemic have cushioned Canadian household balance sheets.