Ketki Saxena
Investing.com - The Bank of Canada dialled back the pace of its tightening cycle today with a 50 bp increase that fell short of market pricing and economist expectations for another 75 bp hike.
Josh Nye Senior Economist at RBC (TSX:RY) (the only major Canadian bank to have called for a 50bp rather than 75 bp move) notes that “With today’s smaller-than-expected rate increase, the BoC has entered the late stages of what has been a historically rapid tightening cycle.”
RBC cites a deteriorating global backdrop, slowing domestic growth, signs of a softening labour market, and declining headline inflation all indicating “we are getting closer to the end of the BoC’s tightening phase.”
James Orlando, director and senior economist with TD (TSX:TD) Economics also notes that “Though the BoC is not done hiking this year, we are clearly nearing a peak in the policy rate.”
Benjamin Reitzes, managing director, Canadian rates & macro strategist, with Bank of Montreal (TSX:BMO) believes that although the 50 bps move was smaller than expected, “a weakening economic backdrop suggests this ultimately could be the right move.”
Reitzes notes that “The Bank’s decision not to deliver what the market was anticipating was driven by a meaningful downgrade to the economic outlook.”
The bank now expects 0.9% annual GDP growth next year as the economy stalls. The forecast is a significant downward revision from its previous estimate of 1.8%.
However, Reitzes notes that while the economy cools substantially, “Inflation is still red-hot and has shown no real signs of cooling yet. … Hopefully, that doesn’t come back to haunt them in 2023 if inflation remains stickier than expected.”
Andrew Grantham, Economist with CIBC (TSX:CM) Capital Markets further points out that though the Bank of Canada may have been forced to slow its path of rate hikes as the Canadian economy contracts, the inevitable result of stabilizing rates too soon is the risk of inflation becoming entrenched.
Reitzes writes, “even with the weaker growth profile, the Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, while the “economy is losing momentum maybe a little quicker than previously anticipated.”
In terms of what’s next, economists are largely forecasting a terminal rate of 4-4.25%. The next Bank of Canada rate decision is scheduled for Dec. 7. Money markets are currently pricing in an 82% chance of a 25 basis point hike in December and 10% odds that the bank will hold the rate steady.
The Canadian central bank, for its part, remains enigmatic about the prospect. In a press conference following the announcement, Governor Tiff Mcaklem stated that"Next time the bank raises rates, it could be another larger-than-normal hike, might be a normal-sized one."
He reiterated however that in the current climate, "It was appropriate to slow the pace of increase in our policy rates from very big steps to a big step.”