Yes, the Bank of Canada raised the Key Rate to 4.75% on June 7th.

After inflation peaked at 8.1% back in June 2022, the political consensus was that inflation was “transitory” and would drop month-to-month and gradually transition back down to around 3% this year. And since last July, using interest rates as levers, inflation went on that downward trajectory all the way to 4.3%. Then a bump… an inflation surprise. CPI inflation popped 0.1% higher in April - a tiny fraction, but significant enough to start forecasters chattering that the BoC would push rates up.

Then came April’s employment numbers. Forecasters had expected employment to decrease. Instead, it rose 0.2%. And the precipitating factor - the Canadian economy surprised all with 3.1% GDP growth in the first quarter of 2023, beating forecasts of only 2.5% growth. It was a trifecta of unexpected reports.

According to the Bank of Canada, “Consumer spending was surprisingly strong.” The BoC went on to reflect that the demand for services continued to rebound, housing activity reaccelerated, and the labour market remained tight. All of which shows that excess demand in the economy looks to be more persistent than anticipated.

Some pundits see the Benchmark Rate hike as a “better now than later” move by the BoC. It’s “shock value” at a time when companies take notice and will begin implementing strategies before the summer vacation mindset has too few really paying attention.

Unlike the BoC, on June 14th, the U.S. Federal Reserve “paused” its rate hikes after a 10-meeting streak of raising interest rates, with the Benchmark Rate going up 5% since March 2022. What seems to have cemented the decision was that the U.S. 12-month inflation rate fell to a two-year-low of 4%.

Forecasters and Central Banks deal with “What Ifs” affecting future events, as they attempt to predict upcoming economic scenarios. And like strategic moves in chess, it’s about putting pieces in place now to influence future outcomes. Will this BoC move create the desired cooling effects? Timed now, their bet is yes. Lower interest rates are still on the horizon, but first some tightening that it’s hoped will cause broad-based re-thinking.