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Analyzing Past Bank of Canada Rate Increases

BMO Capital Markets recently made some interesting observations about the Bank of Canada’s  rate hike tendencies.

See:  Bank of Canada Tightening Cycles

Despite a limited sample size, BMO listed the following common traits from prior rate increase cycles:

  • Bank of Canada (BoC) rate hikes come in “clusters, moving across a minimum of two consecutive announcement dates. (If this holds true, the BoC will raise rates again on July 20.)
  • 84% of the past 25 rate increases have been 25 basis points
  • The BoC has often paused its rate hikes during past tightening cycles–sometimes more than once in a given cycle
  • The BoC has shown it will tighten even with core CPI inflation below its 2% target (That’s largely because the BoC tries to anticipate inflation and because it takes roughly a year or more for rate hikes to work through the economy.)
  • Rates rose an average of 200 basis points over 18 months in the past four cycles


(Chart via BMO Capital Markets, Author: Michael Gregory, CFA, Senior Economist)

BMO says the Bank of Canada typically sets policy after heavy consideration of five “C’s:”

  1. Core CPI (inflation)
  2. Canadian dollar
  3. Commodities
  4. Cross-border exports (to the U.S.)
  5. Crises (economic, financial, or geopolitical)

That last “C” happens to be a factor today, courtesy of the European debt crisis. Nonetheless, BMO says: “We judge the Bank’s scale will eventually tip to the domestic data side, and the new tightening cycle will toe the stylized line.”

In other words, BMO expects concerns about European debt to fade at some point, with the BoC continuing its path to more normalized (higher) interest rates.