What to expect from Bank of Canada – experts are divided

After the Bank of Canada’s decision to keep the interest rate at the current level, expert opinions regarding the central bank’s further actions regarding interest rate policy were divided.

On Wednesday, the Bank of Canada announced it was keeping its benchmark rate at 5% in its ongoing push to bring inflation down to two percent, in line with most economists’ expectations.

Following the announcement, experts who spoke to Bloomberg had varying opinions on whether Canadians should expect further rate hikes before the end of 2023.

In a written statement announcing its decision, the Bank of Canada highlighted signs of economic weakness seen in recent months (which is necessary to reduce inflation) and also warned that it is prepared to raise interest rates further if necessary.

“In particular, we will assess whether excess demand dynamics, inflation expectations, wage growth and corporate price behavior are consistent with achieving the two percent inflation target,” the statement said. “The Bank remains resolute in its commitment to restoring price stability for Canadians.”

The next rate announcement is scheduled for October 25th. Earl Davis, head of fixed income and money markets at BMO Global Asset Management, said he believes Canadians can expect further gains in the near future.

“We were not expecting an increase today, there will be two more meetings before the end of the year, and we assume that the Bank is going to increase the rate in at least one of them,” Davis said.

Meanwhile, Ed Devlin, founder of Devlin Capital and former head of Canadian portfolio management at PIMCO, wasn’t so confident that further rate hikes were in the offing, although he didn’t rule out the possibility.

“I think we’re probably done, but I also think that people who are too convinced about this issue (or about any other point of view) are probably being a little naive because there’s so much uncertainty out there.” he noted.

Tu Nguyen, an economist at RSM Canada, also said the Bank of Canada’s pause will continue.

“The Bank of Canada has likely completed its rate hike cycle, resulting in a peak rate of 5%,” she said in a written statement. “Monetary policy designed to cool a previously overheated economy is working, but the Bank is reluctant to tighten it too much. Further rate increases risk pushing the economy into recession and causing unnecessarily large job losses.”

Nguyen said the freeze will last until 2024, although she doesn’t expect rates to be cut for quite some time, arguing that cutting rates too early risks accelerating inflation again.

The Bank of Canada will hold two more interest rate meetings this year – on October 25 and December 6.