The central bank showed little sign that it’s ready to hit pause on rate jumps, says economist
The Bank of Canada’s announcement last week on its benchmark policy rate was a clear indication that it intends to continue its rate-hiking path in the coming months, according to a prominent economist.
Benjamin Tal (pictured), deputy chief economist of CIBC World Markets, told Canadian Mortgage Professional that the central bank had used “very hawkish” language in its statement on Wednesday, which saw a 75-basis-point hike bring its trendsetting interest rate to 3.25%.
In that announcement, the Bank said the outlook for inflation meant its governing council believed the policy rate would need to rise further.
“Basically, the Bank of Canada is telling you, ‘We are not done,’” Tal said. “This is the Bank with a very clear mission, to make sure that inflation expectations are under control.
“The fear is that they’re losing the battle here if they’re not seen as very aggressive, so it was a bit more hawkish than the market expected, quite frankly.”
The statement showed that the Bank was “not taking any chances with inflation,” Tal said, despite the annual rate having slowed slightly in July to 7.6%, from 8.1% the previous month.
Its Press release accompanying the decision on September 7 indicated that measures of core inflation were ticking upwards across many countries, with inflation, excluding gasoline, having risen in Canada and short-term inflation expectations remaining high.
The risks of elevated inflation becoming entrenched would increase, the Bank added, the longer those conditions continued.
CIBC had said before the Bank’s announcement that a three-quarter-point hike in September could be the central bank’s final rate increase of the year – and Tal said it should weigh its next decision carefully before making further rate moves.
“I think that we are very close to overshooting territory,” he said. “What I mean by that is maybe the Bank of Canada should stop here and assess the impact on the housing market and the rest of the economy before continuing.”
That would be a “tricky” decision, he said, especially with inflation remaining resolutely high despite previous rate hikes. “Show me the central bank that will be willing to stop raising interest rates while inflation is still up there – and there’s so much pressure to move,” he said.
It was possible, he added, that the Bank would hike its benchmark rate by another 50 basis points before starting to cut rates to bring it back to around 3%. Still, the neutral rate – in other words, where the Bank rate will ultimately settle – would still be notably higher than its previous peak, 1.75%, in an economic environment that has shifted dramatically this year.
The central bank is effectively hoping that it can bring inflation back to its target rate of 2% by 2024, Tal said, with little prospect of that occurring next year. Because it has no control over up to 65% of inflation, which is influenced by supply chain trends from outside, the Bank needs to be more aggressive with its rate increases, he added, to control the other 35% to 40%.
The Bank had surprised market watchers in its previous policy rate announcement with a 1% rate increase, a larger hike than many had expected. Still, there was little surprising about its September move, according to Tal – and five-year bond yields, and by extension fixed interest rates, were unlikely to see much movement as a result.
“The market is already pricing in this aggressive move. This is already priced in, so any movement in the five-year rate at this point will be limited,” he said. “So, it’s really more variable rates, as opposed to five-year rates [that will be impacted].”
Wednesday’s decision was the central bank’s fifth rate hike in 2022, with that cycle having brought an end to the rock-bottom policy rate that prevailed throughout the first two years of the COVID-19 pandemic.
The announcement means the rate is now a full three percentage points above that level, which came into play as the Bank slashed rates amid widespread economic uncertainty and public health restrictions in March 2020.
The Bank is scheduled to make its next policy rate announcement on October 26, with its Monetary Policy Report – detailing its full economic and inflation outlook – set to arrive on the same date.