Canadian dollar gains after Bank of Canada’s surprise rate hike to 4.75%

Canadian dollar extends recent gains toward monthly highs of C$1.333 level per U.S. dollar after the Bank of Canada (BoC) unexpectedly hike its benchmark interest rate by 25bps to a 22-year high of 4.75% on Thursday morning to curb sticky inflation and slow down an overheating economy.

The move from the BoC comes after its commodity dollar rival RBA- Royal Bank of Australia also stunned markets by hiking interest rates on Tuesday by 25 bps to 4.10%, warning of more rate hikes to temper rising pricing pressures.

Two hawkish central banks in a row have now surprised markets, raising the risks of more rate hike surprises by other major bankers such as the Federal Reserve, ECB, and Bank of England later in the month.

Canada's interest rate decision

The USD/CAD pair fell 0.25% to nearly C$1.3330 given the strength on the Canadian dollar after BOC’s rate hike and the weakness on the greenback, where the DXY-dollar index broke below the key 104 level this morning.

If the pair break below the C$1.33 support level, the price could re-test the next important area of C$1.3250, near the 2023’s lows, and the lowest since mid-September 2022.

USD/CAD pair, Daily chart

Contrary to most economists’ forecasts, the BoC decided to raise interest rates by 25 bps for the first time since January 2023, citing persistently high inflation as the primary factor driving the rate hike decision.

In its statement, the Bank of Canada expects CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year’s large price gains fall out of the yearly data.

Yet, what concerns BoC which forced her to hike rates again, is that the persistent high core inflation which runs in the 3½-4% range for several months, and excess demand, might increase the risk that CPI inflation could get stuck materially above the 2% target of the bank.

In this context, economists are still pricing in about a 50/50 chance of another interest rate increase at the BOC’s next meeting on July 12, giving support to the recent upward trend momentum of the Canadian dollar against major peers.