The Bank of Canada surprised many when its Oct. 26th rate hike decision came in with less intensity than the market expected. Instead of a 75 basis point increase, the BOC opted for a slightly more placid 50 basis point increase. The 6th rate hike of the year takes rates in Canada to 3.75%. Analysts see the slowdown as evidence that the Bank of Canada is worried about the impact of its rate hikes on the economy. Risks of a recession continue to build, and the unemployment picture has been gradually worsening. Economists see the 50 basis point increase as a strong indicator that the ‘hiking cycle’ is beginning to unwind. A CIBC economist believes that Wednesday’s decision marks the end of 75 basis point increases. But the BOC isn’t done yet.

In its widely read statement, the Bank of Canada made it clear that more hikes are on their way; “Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.” Expectations of another 50 basis point increase on December 7th, the next decision day, are strong. But some believe that a further hike in December will be the last, marking the end of the cycle – and that rates will stay high through much of 2023 to bleed inflation out and vanquish it, that’s the view of Karyne Charbonneay, CIBC’s exec. director of economics; “rates will have to stay at that level at least through the end of 2023 to help bring inflation back down to target.“

The Bank of Canada now “expects” a recession in 2023. The best case scenario in their view is three quarters of zero growth, or extremely mild growth through 2023. The Bank is optimistic that even if growth does slow, the overall economy should rebound by the end of 2023 and have a decent 2024 (by which time inflation should be dead and buried). The worsening outlook on the economy is why the BOC acted the way it did. Benjamin Reitzes, a senior BMO economist responded to the lower than expected rate hike; “the Bank of Canada surprised markets, but a weakening economic backdrop suggests this ultimately could be the right move.” He continued, adding that “today’s decision puts a bit more emphasis on the economy. Hopefully that doesn’t come back to haunt them in 2023 if inflation remains stickier than expected.” Let’s hope that rates in and around 4% are enough to tame the worst inflation Canada has seen in over 40 years.