Bank of Canada Raises Rates Another 50 Basis-Points, Hints at Pausing Hiking Cycle

For the sixth consecutive time this year, the Bank of Canada hiked interest rates once again, delivering another 50 basis-point increase. But, the central bank’s updated choice of wording suggests the aggressive cycle may be coming to an end.

The latest tightening brought the overnight rate to 4.25% on Wednesday morning, the highest in nearly 15 years, and in line with projections from economists polled by Bloomberg. The BOC pointed to stronger-than-expected GDP growth last quarter and a tight labour market— both indicative of an economy operating in excess demand. However, policy makers acknowledged the bank’s tightening cycle is easing domestic demand, consumption is showing signs of moderating, and the housing market is on the decline.

Governor Tiff Macklem now anticipates economic expansion will flatline for the remainder of the year and into the first half of 2023. “Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” read the bank’s accompanying news release. The updated language suggests policy makers may be heading towards a pause on the rate hiking cycle, and wait for incoming data to make more detailed adjustments.

Still, policy makers remained fixated on exceptionally elevated consumer prices, with short-term inflation expectations remaining stubbornly high. “The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched,” policy makers warned. As a result, the bank reiterated its commitment to bring inflation back to the 2% target rate, pointing to the rolling three-month decline in core inflation as a pat on the back for its accomplishments so far.

Meanwhile, this week started off with the yield curve inverting by the most since the early 1990s, indicative that a recession may be looming on the horizon. Following the BOC’s rate decision, both the loonie and bonds rose, with the 2-year bond yield rising to as much as 3.81%.

Information for this briefing was found via the BOC and the sources mentioned. The author has no securities or affiliations related to this organization. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.