Economists do not believe Bank of Canada is poised to stall its rate hike cycle, even if there are signs that inflation is easing and the economy is weakening.
Canada’s central bank is expected to announce an eighth straight rate hike on Wednesday, with most commercial banks forecasting a quarter of a percentage point increase. That would bring the central bank’s prime rate to 4.5%, the highest level since 2007.
Although headline inflation slowed significantly last month, Royce Mendes, Desjardins managing director and head of macro strategy, said the labor market remains hot and core inflationary pressures remain. stick tight”.
“I think (the bank will) use all of that to justify further rate hikes,” Mendes said.
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Last month, the unemployment rate fell to 5%, slightly above the all-time low of 4.9%.
After raising interest rates again in December, the Bank of Canada signaled that it was willing to pause its aggressive rate hike cycle, depending on upcoming economic data releases.
The Bank of Canada can be encouraged that headline inflation is slowing. After peaking at 8.1% in the summer, the annual inflation rate fell to 6.3% in December.
However, Mendes noted that core inflation measures, which do not include more volatile items like food and gas, fell only slightly last month.
For months, market watchers have been trying to guess when the central bank will be ready to stop raising rates, with some expressing optimism that a December rate hike will be the last. together. This time, however, most forecasters seem to agree on a January rate hike, saying next week’s hike will be the last of the cycle.
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Mendes said while he also expects this to be the last rate hike for now, Canadians should not be overly confident that rates will not rise further.
“The Bank of Canada needs to make sure they are doing enough to get inflation back on track towards the 2% target. And that’s not clear yet,” he said.
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Even with its intention to stop raising rates, the Bank of Canada is unlikely to back down too much in next week’s announcement, said James Orlando, chief economist at TD.
Orlando expects the Bank of Canada to say it does not foresee a need for more rate hikes, but it will continue to monitor how economic conditions develop. That way, the door will be open for further rate hikes if necessary, he said.
“Obviously, if things get out of hand… they might have to raise rates again,” Orlando said.
Since March, the Bank of Canada has begun one of the fastest rate hikes in its history. After cutting interest rates to near zero during the pandemic to stimulate a slumping economy, in 2022 it briefly raised rates to rein in skyrocketing prices.
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The rate hike has slowed the housing market significantly and is expected to affect the economy more broadly over time. Businesses and consumers facing higher borrowing costs will pull back on spending, thereby reducing demand in the economy and easing upward price pressures.
So far, however, economists say much of the decline in inflation has been attributed to things beyond the Bank of Canada’s control, such as lower energy prices.
That means the full burden of the rate hike is yet to be felt. Mendes said the Bank of Canada is trying to balance the risks of raising rates too much or too little.
“It was a very difficult balancing act,” he said.
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The Bank of Canada will also release its quarterly monetary policy report on Wednesday, which will provide updated forecasts on economic growth and inflation.
As the Canadian economy reacts to higher interest rates, many economists expect Canada to enter a mild recession this year.
While there is no evidence of a recession yet, there are signs that high interest rates and inflation are weighing on companies and consumers.
This week, the Bank of Canada released surveys on business outlook and consumer expectations, showing that companies are losing confidence and Canadians are cutting spending to make up for the bills. necessities are expanding.
At the same time, inflation expectations remain relatively high in surveys.
“That suggests, in essence, the bank might want to tighten up a little bit more in the near term,” Mendes said.
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