One more interest rate hike is expected from the Bank of Canada on Wednesday

Most experts believe that the Bank of Canada will announce one more 0.25% rate hike on Wednesday and then will take a pause in one of the most aggressive tightening cycles in history.

Last month, the BoC signalled that we’re getting close to the end of its inflation-fighting campaign, in which it raised borrowing costs seven times in a row last year. According to the Bank, this week’s decision would depend on coming data.

Since that moment, most economic indicators have exceeded the average forecasts. Unemployment remains almost at a record low level and consumer spending is holding up relatively well even amid higher prices and growing borrowing costs. Inflation keeps going down, with December reporting an annual rate of 6.3% after June’s peak of 8.1%. However, it’s still far above the central bank’s 2% target level.

The pace of the national economy in the fourth quarter of 2022 increases the possibility of one more rate hike this week. Most Bay Street analysts predict a 0.25% increase, and financial markets are pricing in about a 70% chance of such a hike. If this happens, the Bank’s key lending rate will reach 4.5%.

Most experts believe it will be the last increase in the current tightening cycle. Although the BoC hasn’t taken inflation back to the target level yet, we need to remember that interest rate changes work with a significant lag. It can take about 6-8 quarters for the rate changes to have a full influence on inflation. It means that most of the pain from the 2022 rate hikes has yet to affect the real estate market.

The bank is slowing down the economy on purpose, increasing borrowing costs to reduce spending on goods and services and slow the pace of price growth. At the same time, it’s trying not to overdo it, which is extremely difficult considering the effect lag.

“We are trying to balance the risks of over- and undertightening monetary policy,” – the BoC Governor Tiff Macklem noted.

“If we increase rates too high, we may cause an unnecessarily painful recession and miss the inflation target. If we don’t increase them high enough, inflation will stay elevated, and households and businesses will expect persistently high inflation.”

In his opinion, the risk of not doing enough is stronger.

According to economists, inflation will continue to fall. The sharp hike in energy and other commodity prices that we saw in the spring of 2022 will fall out of the annual data in the coming months. Prices for durable goods are already showing no changes or even starting to go down, as supply chains improve and demand for non-essential products falls.

In October, the Bank said it expected CPI inflation to be about 3% by the end of 2023, and back at the 2% target level by the end of 2024. The central bank will release new inflation and economic growth forecasts this week.





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