After years of cutting or standing still, Canada's central bank has moved the other way. Governing Council, led by Governor Tiff Macklem, lifted the benchmark overnight rate to 2.5% on Wednesday, a step economists had mostly expected, Bloomberg reported. Policymakers framed the increase as a guard against energy costs pushing inflation higher, and they left room for more, saying they would assess the need at each decision. For households already paying more at the pump, higher borrowing costs now arrive alongside higher fuel bills.
Oil cuts both ways for Canada. The country is among the world's largest crude producers, so a higher price lifts export income and provincial royalties even as it raises the cost of gasoline, heating and freight for everyone else. That second effect is what concerns a central bank charged with keeping inflation at target: a sustained jump in fuel prices can seep into wages and into the price of anything that moves by truck or rail. On the day of the decision, US crude climbed as fighting in Yemen renewed worries about Middle East supply, Reuters reported. Alongside the decision, the bank released its Monetary Policy Report, one of four a year laying out where it expects inflation and growth to head and what risks it sees, according to the Bank of Canada. The bank works to a fixed calendar of eight policy announcements a year, and it sets out its reasoning publicly every time it adjusts or holds the rate.
Markets took some time to digest the message. The Canadian dollar firmed against the US dollar and two-year government bond yields climbed to their highest in more than two years, Reuters reported. Swap pricing implied slightly less than even odds of another increase in December and fully priced a second hike by January. Ten-year yields rose too, by a smaller margin, on a day when the Federal Reserve held US rates steady.