In the aftermath of the surprise 100 basis point hike from the Bank of Canada, the market is leaning towards similar 'front loading' moves from central bank elsewhere.
The odds of a 100 basis point hike from the FOMC are now up to 38% from about 28% before the BOC. The odds of 50 bps from the ECB have also ticked to about 25%.
In its statement, the Bank of Canada did pare back language that said it is "prepared to act more forcefully" and explicitly said this is front loading. That doesn't necessarily mean the terminal rate will be higher, though the market is now pricing in a slightly higher peak at 3.75%. There's an argument that by hiking more now, the BOC won't need to hike as much later.
It's something they hint at in the statement:
"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. If that occurs, the economic cost of restoring price stability will be higher," the statement says.
That dynamic is likely why USD/CAD has only fallen back to 1.2987 in the aftermath of the decision, which is where it was before the US CPI report.
Where the Bank of Canada might exercise some caution is on the growth side of the ledger. They see 3.5% GDP growth this year and 1.75% next year.
David Rosenberg certainly doesn't think that's realistic.
"The Bank of Canada panicked today with its 100 beeper (!) and the yield curve has inverted. The housing bubble can be assured now of bursting and likely in spectacular fashion. The Canadian dollar popped on the rate hike, but the coming recession makes it a hard “sell," he wrote.
If all central banks go down this same path, global and Canadian growth could certainly disappoint.
