No rate hikes expected from the Bank of Canada on Wednesday

It’s been almost a year since the Bank of Canada started one of its most aggressive rate-increase cycles.  However, it seems like the hike marathon may be over on Wednesday, as the central bank is expected to keep its key lending rate unchanged for the first time in 12 months.

Following eight rate hikes in a row, the BoC now believes it’s done enough to restrain inflation. The pace of consumer price growth still exceeds the bank’s target range significantly, but there are more and more signs that higher borrowing costs are slowing the economy and reducing price growth.

In January, central bank Governor Tiff Macklem announced a “conditional pause” to rate increases, making the March 8 rate meeting a turning point.

However, he didn’t rule out a possibility of further hikes in case Canada’s economy performs better, and inflation proves stickier, than the Bank is predicting. At the same time, most analysts say weaker-than-expected GDP growth in Q4 of 2022 and a larger-than-expected decline in inflation in January should make the BoC keep its overnight rate unchanged this time at 4.5%.

Such a decision would make the Bank of Canada the first major central bank to stop raising interest rates. It would mean we are moving in a different direction compared to the U.S Federal Reserve, which is expected to raise rates a few times more.

It’s important to understand that interest rate changes work with a certain lag, reducing consumer spending as homeowners renew mortgages at higher rates, and raising unemployment as businesses face a decrease in demand. This postponed reaction increases the risks of absolutely different outcomes: if the central bank doesn’t do enough, the inflation will skyrocket again; and if it does too much, the economy will face a painful contraction.

Now, Canadians have to find more money for their unexpectedly higher monthly payments, either by tightening their budgets or by using their assets. Depending on how they deal with it, central banks will understand whether they can keep raising rates or whether they’ve done too much already.

“Consumers are experiencing huge stress right now and insolvency rates are beginning to grow to pre-pandemic levels, which is disturbing,” – noted Stacy Yanchuk Oleksy, the chief executive officer of Credit Counselling Canada. “Those who are struggling will have to reduce their expenses, so I believe consumer spending will slow down.”

Actually, it’s already happening in sales of discretionary purchases, e.g. luxury cars and all-terrain vehicles. However, the main source of stress and economic weakness could be the real estate market.