The S&P TSX Composite Index (TSX:TSX) was slammed on Wednesday, dropping to its lowest point since March 8, 2021 to bounce up off the $18,378.83.
The Bank of Canada hiked the key interest rate by a full percentage point to combat soaring inflation. The country’s benchmark interest rate now comes in at 2.5%, an increase of 2.25% since the start of 2022.
The news shook Canadian markets, which had priced in a 75 basis point increase. The Bank of Canada had just raised interested rates by 50 bps in June.
Inflation in Canada hit 7.7% in May, a 39-year high and far above the Bank of Canada’s 2% target.
CIBC senior economist Karyne Charbonneau said in a note that its more likely Canadians could see interest rates soar to 3.25% before coming down.
The Bank of Canada is walking a tight rope in an attempt to combat inflation without throwing the country into a recession, much like the Federal Reserve in the U.S.
Although the hike in interest rates will compound the pain Canadians are already feeling due to soaring inflation, the Bank of Canada believes its aggressive approach is the best way to handle the situation.
"We are increasing our policy interest rate quickly to prevent high inflation from becoming entrenched. If it does, it will be more painful for the economy — and for Canadians — to get inflation back down," said Central Bank governor Tiff Macklem.
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Inflation data from June is expected to be released by Statistics Canada on July 20.
In the U.S., data released from the Bureau of Labor and Statistics on Wednesday showed inflation soared 9.1% year-over-year in June, up 1.3% month-over-month, which came in well above estimates.
On July 26 and July 27, the Federal Reserve will meet to decide how much to raise interest rates in the U.S. The markets have priced in a 75 bps hike but according to swap markets, traders and investors are now anticipating the possibility of a full percentage point raise, with the odds of a 1% hike coming in with a one-in-three chance.
In June, the Fed raised interest rates by 75 bps to 1.5% to 1.75%. The Central Bank, like the Bank of Canada, wants to bring inflation down to 2%.
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