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What BOC’s Surprise Means for the Fed

What BOC’s Surprise Means for the Fed

BOC shocked the markets on Wednesday by raising rates 25bps. Everyone expected it to be a non event. Given Canada’s unique position, the move impacted how many analysts viewed central banks around the world. The number of traders expecting a “skip” at the next Fed meeting dropped dramatically (though it’s still a majority).

What happened?

BOC was first G20 nation to pause rates in February. Canada, like many other major economies in the world, experienced a spike of inflation at the beginning of this year. This made Governor Macklem, and his Board, sufficiently confident to announce a pause in rate increases. The bank made it clear that if more rate increases were needed, they would be considered.

Inflation has been on the rise in recent months. Particularly the core with relation to “second level” effects. Inflation increases the demand for higher wages. Businesses are forced to increase wages in order to retain employees when unemployment is low. This is a “secondary” effect of higher prices, and is generally a worrisome trend for central bankers, because it can mean…

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