The Bank of Canada raised its benchmark interest rate by half a percentage point to 4.25 per cent on Wednesday, the latest oversized step in its efforts to tamp down inflation.
The central bank also signalled in a statement accompanying the decision that a pause in rate hikes could be coming.
“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,” the Bank of Canada statement read.
CIBC chief economist Avery Shenfeld said in a note to clients Wednesday after the announcement that this marks a departure from the central bank’s language following recent hikes, where it said outright that “rates will need to rise further.”
“The Bank of Canada flashed a yellow card on its rate hiking team, by sounding more cautious about its willingness to press on to even higher interest rates in 2023 even as it tightened today,” Shenfeld wrote.
He added that he expects the central bank’s tightening cycle will peak here and hold at this rate for much of 2023.
The Bank of Canada’s key interest rate now sits at its highest level since 2008.
Wednesday’s move marks the seventh and final interest rate increase of the year, in what has been one of its most aggressive tightening cycles in its history.
Money markets and many economists had expected the central bank would move only 25 basis points in its final decision of the year.
Economy more resilient than bank expected
The central bank’s policy rate is used to raise borrowing costs and slow spending demand among Canadians in hopes of bringing inflation back down to its two per cent target.
The bank said in its statement Wednesday that it will be watching how interest rates are working to slow demand, how global supply challenges are resolving and whether inflation and expectations around rising prices are cooling to gauge the need for further rate hikes.
Though the policy rate has risen a total of four percentage points since March of this year, headline inflation remains at 6.9 per cent nationally, per Statistics Canada’s most recent data release.
The Bank of Canada said Wednesday that “price pressures may be losing momentum,” citing a drop in the three-months rate of change for core inflation measures, but maintained that inflation is “still too high.”
Canada’s labour market also remains tight, with the unemployment rate ticking down to 5.1 per cent in November from 5.2 per cent the previous month.
The central bank noted that the economy outperformed its estimates in the third quarter, but reiterated its call for growth to “essentially stall through the end of this year and the first half of next year.”
Bank of Canada governor Tiff Macklem said in a speech after the previous rate hike in October that it’s just as likely the economy sees a few periods of moderate growth as it is to see a mild contraction; two periods of consecutive declines in gross domestic product is the traditional definition of a recession.
Some big bank economists see rate peak in 2023
While Shenfeld sees the Bank of Canada holding its policy rate at current levels for the year ahead, some of his colleagues at Canada’s other big banks think Macklem and his team aren’t done yet.
BMO chief economist Doug Porter said in a note to clients Wednesday that he feels upcoming data releases ahead of January’s rate decision will reflect “the stickiness of underlying inflation” and drive the Bank of Canada to a 25-basis-point increase, topping out the policy rate at 4.5 per cent.
James Orlando, director and senior economist with TD Bank, echoed the 25-basis-point call, and said a quarter-point step in January will allow the central bank to finally sit back and let the lagged effects from its rate hikes to date take effect.
“At that time, it can move to the sidelines, allowing the economy to recalibrate and let inflation continue its downward trend over 2023,” he said in a note Wednesday.
— with files from Reuters, The Canadian Press