The Bank of Canada raised the overnight rate to 4.25%, while stating that it will continue with Quantitative Tightening (QT).
On rising prices, it stated that “inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched.”
On economic growth, the Bank stated that “GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand.”
On the future path of policy, the Bank noted that it “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. Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.”
Key Implications
The Bank of Canada delivered another 50 basis point hike! With economic growth still running above trend and the labour market remaining tight, the BoC decided that it needed to get rates to an even higher level in order to force the economy back into balance. However, there was a large shift in forward-looking language in the removal of any reference to further rate hikes being required. Prior to today’s announcement, the Bank had been signaling the need for more rate hikes, but now it is debating whether it needs to hike rates further at all.
We don’t think the BoC is done yet, but it is quickly approaching the end of its hiking cycle. As all Canadians know, the rapid rate hikes over 2022 have caused a dramatic adjustment in the real estate market, and we are starting to see this in consumer spending data. We expect this to continue to weigh on the economy over 2023 as the lagged effects of past hikes filter through. We expect the BoC will deliver its final rate hike in January, bringing the policy rate to 4.5%. At that time, it can move to the sidelines, allowing the economy to recalibrate and let inflation continue its downward trend over 2023.
