The Bank of Canada is expected to hike its overnight rate to its highest level in 14 years on Wednesday as it attempts to tame inflation, and it may signal its tightening cycle is near an end as the economy starts to slow, analysts said.
In the past nine months, the central bank has increased borrowing costs at a historically fast pace - by 350 basis points to 3.75% - and it will go up when the decision is made at 10 a.m. The President Tiff Macklem said that interest rates must go up further and he opened the door to an increase of a quarter of a percentage point after multiple oversized hikes in recent months, including 50 basis points in October.
Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, said in a note that it's a close call but we're expecting a 50 basis-point rate hike from the Bank of Canada.
While peak inflation may be behind us, the risks remain skewed to the upside, with a non-trivial possibility that inflation is stickier than expected. Money markets are betting on a 25 basis-point increase, but a slim majority of economists believe that a larger move is coming from a Reuters poll.
Inflation was at 6.9% in October, but is still three times more than the central bank's 2% target, and the economy grew at an annualized 2.9% rate in the third quarter.
A falling property market and one of the highest household debt-to-income ratios in the world mean that the economy is sensitive to rate increases.
The bond market is now signaling that there is a risk if the bank tightens campaign overshoots cause a deeper downturn than expected.
There is a question whether or not the Bank of Canada raises rates 25 or 50 basis points, or if it should be committing to raise rates further in 2023, according to Royce Mendes, head of macro strategy at Desjardins Group. It is not clear that it is necessary, given the lag in monetary policy. The bank believes that the policy interest rate will need to increase as it continues to tighten since it began this tightening cycle. Some analysts say it might be time to drop that language and open the door to pausing rates.
At some point, the Bank of Canada is going to be in a position where it's appropriate to just let rates be for a while, Mendes said.