Bank of Canada Hikes Interest Rates

Source: Dukascopy Bank SA
On Wednesday, March 2, the Bank of Canada hiked its Overnight Rate from 0.25% to 0.50%. The rate hike was expected by the markets. Meanwhile, the central bank announced that it would keep its holdings of government bonds unchanged.

In addition, the bank announced that it would implement more monetary tightening in the future.

Quoting the statement: "The Bank of Canada today increased its target for the overnight rate to ½ %, with the Bank Rate at ¾ % and the deposit rate at ½ %. The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds on its balance sheet roughly constant until such time as it becomes appropriate to allow the size of its balance sheet to decline.

The policy rate is the Bank's primary monetary policy instrument. As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further. The Governing Council will also be considering when to end the reinvestment phase and allow its holdings of Government of Canada bonds to begin to shrink. The resulting quantitative tightening (QT) would complement increases in the policy interest rate. The timing and pace of further increases in the policy rate, and the start of QT, will be guided by the Bank's ongoing assessment of the economy and its commitment to achieving the 2% inflation target."

Released Document

Bank of Canada increases policy interest rate

The USD versus Canadian Dollar pair reacted to the news with a 20 base point drop and recovery over the span of three minutes.

On a larger scale, the rate has been trading between the 1.2650 and 1.2800 level since the end of January.

Initial Reaction

Larger scale situation

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