A Canadian dollar currency-related exchange traded funds gained after the Bank of Canada came out with a surprise one percentage point interest rate hike to combat the rising inflation levels.
The Invesco CurrencyShares Canadian Dollar Trust (FXC) rose 0.2% on Wednesday.
Meanwhile, the Canadian dollar was hovering around $0.7704.
The Canadian central bank raised its policy rate by a full percentage point to 2.5%, marking an outsized rate hike last seen in 1998, due to “higher and more persistent” inflation and the heightened risk of those price gains becoming entrenched, Bloomberg reported. It also warned that more rate hikes could be down the road.
The move was also greater than the 75-basis point hike that many economists and money markets had previously priced in.
“With the economy clearly in excess demand, inflation high and broadening, and more consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today,” the Bank of Canada said in a statement.
After the Bank of Canada’s latest move, the policy rate is now at the central bank’s nominal neutral rate, or the midpoint between 2% and 3%, where monetary policy is neither stimulative nor restrictive.
The Bank of Canada also warned inflation could be around 8% for the next few months.
“Surveys indicate more consumers and businesses are expecting inflation to be higher for longer, raising the risk that elevated inflation becomes entrenched in price- and wage-setting,” the Bank of Canada said in a statement. “If that occurs, the economic cost of restoring price stability will be higher.”
Governor Tiff Macklem’s crew of policymakers indicated that recent data that reveal companies and households are beginning to see inflation as a permanent feature in the current economy, the Financial Post reported.
“It’s a little bit of a `wow’ moment,” Tom O’Gorman, director of fixed income at Franklin Templeton Canada, told the Financial Post. “They’re nervous.”
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