Russia’s War A Wild Card
The BoC is following the events closely, but with the economy currently on an expansionary path and inflation has picked up, it expects interest rates to need a further hike. While some have suggested that the central bank was behind the curve, Klein argues that before applying the brakes it was to ensure that the economy was on solid footing, even if it meant allowing inflation to run a bit further.
“The general consensus has been that the BoC will probably increase three or four more times this year,” he says. “The rate hike here is not as relevant as south of the range, and there was general consensus that the Federal Reserve will raise rates four to six times this year.”
Chad Aul, chief investment officer and head of multi-asset solutions at Sun Life Global Investments, also said the announcement was largely in line with his expectations. “We knew they would probably view the Ukraine-Russia situation as a new risk factor, but not necessarily as an overly dovish undertaking.”
Weighing the overall impact of the situation in Ukraine is proving to be a challenge. As the BoC has indicated, the conflict could turn into a drag on economic growth, but it has also created inflationary pressures. Financial sanctions on Russia have had a chilling effect on international traders, who are now hesitant to tap the country’s commodity markets for fear of being caught in an economic crossfire.
While he predicted sustained rate hikes for the next few policy meetings, Aul stressed the need for flexibility to pivot to central banks as more data comes in during the year. Federal Reserve Chairman Jerome Powell also asserted in testimony before Congress yesterday, where he supported a 0.25% hike this month for the Fed, but remained open to larger hikes.
