By Ketki Saxena
Investing.com – The biggest story in Canadian economics is going to be the monetary policy announcement from the Bank of Canada, expected on the 25th of January, with markets and economics expecting a 25 bps move from the Canadian central bank.
It will be the BoC’s eighth consecutive rate increase, and take the central bank's key interest rate to 4.5% - its highest level since 2007, before the Financial Crisis.
While every monetary policy move from the BoC is much watched, investors and economists will be paying extra attention next week, with expectations rising that next week’s move will be the Bank of Canada’s last in this rate hike cycle, and that the BoC will announce a pause moving forward.
Nathan Janzen, Assistant Chief Economist at RBC (TSX:RY) notes, “The Canada’s central bank is expected to slow the pace of interest rate hikes at next week’s policy decision. And odds are that the 25 basis point increase we anticipate (down from the 50 basis point increase in December) could be the last of this hiking cycle.”
At its last move in December, the Bank of Canada signaled it was open to pressing pause on its aggressive rate-hiking cycle (the fast tightening cycle in its history), and would guide its further decision based on subsequent economic data releases.
The subsequent data has since shown that the Canadian economy continues to slow, the housing market cools, and business and consumer spending contracts.
Headline inflation is also slowing - down to 6.3% in December after an 8.1% peak in June.
Notes “Though broader inflation trends are still running above the Bank of Canada’s 1% to 3% target range, they’ve already shown clear signs of losing steam.”
James Orlando, head of Economics at TD (TSX:TD) is also amongst those calling for a 25 bps hike next week to be the Bank of Canada’s last, pointing to the slowing Canadian economy and easing inflationary pressures.
He notes that while the economy is slowing down significantly in nearly all aspects, “Labour markets continue to defy this trend. An unexpected surge in employment in December and a decline in the unemployment rate to a near record low of 5%”
He cites labour market strength as the “the main reason [TD] expect[s] the BoC to follow through with one final rate hike.”
However, he does add the caveat that “"Obviously, if things get out of hand ... then they might have to raise rates again”.
Royce Mendes of Desjardins, while also calling for next week’s move to be the BoC’s last, are also amongst those who warn that the Bank of Canada may be tempted to err to the upside on inflation.
"The Bank of Canada needs to make sure that it has done enough to put inflation back on a path towards the two per cent target. And that's not clear just yet”.
Mendes cites data points such as still sticky core inflation, and increasingly entrenched inflation expectations reflected in the Bank of Canada’s recent business outlook and consumer expectations surveys, as well as the still robust labor market as reasons that the Bank of Canada may follow up with further interest rate hikes subsequent to February.
While consensus is for next week’s move to be the Bank’s last, Mendes notes that “The bank might want to err on the side of tightening a little bit more in the near term.