On Wednesday, the Bank of Canada made a big splash when it became the first central bank amongst developed economies to deliver an interest rate hike of a whopping 100 basis points. The advanced economies in the world are all embroiled in policy-tightening cycles, as officials are trying to get control of the more persistent and higher inflation.
This is the largest rate hike that the Bank of Canada has made since 1998 and policymakers said that there was a higher risk of inflation becoming entrenched in the economy. This increase is certainly higher than the 75 basis points increase of the US Federal Reserve last month, which was the largest it had made since it began to respond to rising inflation this year.
It should be noted that the BOC was certainly not the only central bank amongst the G10 nations that was active on Wednesday.
RBNZ hikes interest rate
The Reserve Bank of New Zealand also hiked up the interest rate by 50 basis points on Wednesday, which is the sixth consecutive increase by the monetary authority. The official cash rate (OCR) in the country has now reached 2.5%, which had last been seen in 2016 in March.
It should be noted that the central bank in New Zealand said that it was comfortable with the aggressive tightening path they have adopted because its goal is to restrain the surging inflation. According to analysts, after this 50 basis points increase, it is likely that the RBNZ would now shift to increments of 25 basis points, as domestic growth is likely to slow down.
US hike also expected
The US Federal Reserve had hiked up its interest rate on June 15th by 75 basis points, which had vaulted it to the top-hawk position in the global market. The federal funds rate had reached the target rate of 1.5% and 1.75%.
The move had come days after the US inflation data showed that annual price rises had hit 8.6%. A market frenzy was triggered on Wednesday, as the US inflation data for the previous month showed that inflation had climbed to a whopping 9.1%.
This could potentially result in even more aggressive action from the US Fed in the coming months. It certainly eliminates the possibility of a slowdown, as some had expected because the economy is undoubtedly slowing. The US central bank is also slowing reducing the stash of assets worth $9 trillion that it had accumulated during the pandemic.
Market expectations defied
As far as the Bank of Canada is concerned, it acted in defiance of market expectations that had predicted a rate hike of 75 basis points. As a matter of fact, the monetary authority asserted that they would continue to hike interest rates, as required.
The BOC’s policy rate had been 1.5% before the rise but has now hit 2.5%, which is the highest it has been since 2008. The major hike in the interest rate also boosted the Canadian dollar.