Monday Market Minute | Jul 18, 2022

BoC delivers a historic 100-basis-point hike — the largest single increase since 1998

What Moved

The Bank of Canada stunned markets on July 13 with a full percentage-point rate increase, taking the overnight rate from 1.50% to 2.50% in a single move — the largest hike since August 1998. Governor Macklem justified the action by citing "the need to front-load rate increases" and warned that inflation at 8.1% demanded "resolute" action. The Canadian dollar surged on the announcement, while bond markets repriced the terminal rate expectations higher. In four months, the BoC had raised rates from 0.25% to 2.50% — a pace that had no modern precedent.

Why It Matters

The 100-basis-point shock reverberated through every private market. Floating-rate private credit portfolios saw another immediate yield uplift, pushing total yields to levels not seen in over a decade. But the speed of tightening also raised the probability of borrower stress. PE sponsors recalculated debt-service coverage on portfolio companies. MICs reassessed variable-rate mortgage exposure. The margin for error in underwriting had narrowed to zero.

Signal to Watch

Corporate borrower payment data over the coming months — the lag between rate hikes and credit stress typically runs 6-12 months.

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