What should we expect from the Bank of Canada this week?

On Wednesday, the Bank of Canada is expected to raise its key lending rate once again in attempt to slow the nation’s economy and reduce inflation down from its four-decade record highs.

According to 31 economists polled by Bloomberg, a rate increase by at least 0.50% is guaranteed, while most of them believe the Governor Tiff Macklem will deliver another 0.75% hike. As a result, the Bank’s overnight rate will reach 3.25%, marking the largest level among major advanced economies.

All six of Canada’s major commercial lenders predict a larger increase, including Goldman Sachs and JP Morgan, while UBS and Moody’s are among the few expecting only a 0.50% hike.

Of course, investors will be looking for any hint on whether more increases will be coming next month, following the discussion that one of the most aggressive hiking cycles may be reaching its end.

“We need a further slowdown in household demand in order to bring inflation back to the bank’s 2% target level,” – RBC economists Nathan Janzen and Claire Fan noted. However, “if household demand and inflation pressures weaken as predicted, the BoC will have to stop its tightening cycle in the nearest future.”

Tomorrow’s meeting will not include a press conference or new economic forecasts, but a Thursday speech by Senior Deputy Governor Carolyn Rogers could clarify the Bank’s way of thinking a little bit.

A rate hike by 0.75% would bring Canada to its highest policy rate since 2008, and raise borrowing costs to a level that will definitely slow the country’s economic growth. (The so-called neutral range for rates, neither stimulating nor restraining activity, is estimated to be about 2-3%.)

Central banks all over the world are slamming on the brakes to stop a post-pandemic sharp hike of inflation. On Tuesday, the Reserve Bank of Australia raised its policy rate by a 0.50%, while the European Central Bank is expected to raise its overnight rate by 0.75% on Thursday. The US Federal Reserve may raise its rate by at least 0.50% later this month.

According to most economists, Macklem’s aggressive tightening cycle is a right choice, as Canada’s economy remains overheated. We can see record high job vacancies and record low unemployment level, pay increases are still high, as workers demand extra compensation for decreased real incomes, risking a wage-price spiral scenario

Although the BoC lost some credibility in its late response to sharply growing consumer prices, it seems to have been restored by its sharp change of direction. Nevertheless, there are still a lot of uncertainties in terms of higher borrowing costs’ influence on the national economy.