The central bank delivered a 25-basis-point increase on Wednesday, and it may not be done yet
The Bank of Canada delivered its first interest rate hike for over three years on Wednesday, sparking immediate questions about how far – and how fast – it might raise rates if it decides further increases are needed.
The central bank’s decision moved its benchmark rate to 2.5%, and its accompanying statement was frank that more hikes could be ahead if the inflation outlook worsens again.
For now, much will depend on the economic and inflation data that emerges in the months ahead, Bank of Montreal (BMO) managing director, Canadian rates and macro strategist Benjamin Reitzes told Canadian Mortgage Professional.
“It’s a little bit early to say how far they’ll go,” Reitzes said. “Looking at market pricing, there’s [a benchmark rate of] about 3.5% by the end of next year, a little further out. And that’s a bit on the aggressive side, I think.
“Getting that high suggests that you’d need a trade deal and some pretty good economic outcomes for that to come to fruition.”
At least one more hike seemingly ahead
It’s still safe to assume that the central bank will raise rates at least once more in the next several months, Reitzes said, either in December or January. The extent of the economy’s weakness in the coming weeks will be a crucial deciding factor in the timing of the next hike.
“The reason for their caution is that they have a pretty soft [GDP] forecast for the fourth quarter, just 0.8% growth,” he said. “If you have that amount of softness in the economy, do they really want to be hiking rates in that environment? The answer is probably no.
“They want to make sure that there is a rebound in growth. So if we do get some numbers coming over the next few weeks that point to a better fourth quarter, then that would be enough for them to likely [hike]. But we don’t get a lot of pieces of information between now and December, unfortunately.”
Central bank governor Tiff Macklem highlighted that persistent lack of clarity in remarks at the press conference following the announcement – a situation that’s exacerbated by ongoing geopolitical chaos.
“We are mindful that uncertainty is still elevated,” he said. “Developments in the Middle East and Canada-US trade relations both remain fluid.”
Inflation concerns persist amid rising fuel costs
The annual inflation rate ticked higher in September, increasing to 3.1% amid continuing upward pressure on fuel prices caused by the US-Iran war.
Some economists viewed that as a mild enough reading for the BoC to keep rates steady in today’s announcement, but a growing number indicated a pre-emptive increase by the central bank was the likeliest outcome of its October decision.
Macklem said fuel costs would probably start to impact other types of inflation if they remain elevated. “The longer energy prices remain high, the more likely it is these costs will spill over to consumer prices more broadly,” he said.
But the consumer price index (CPI) is still well below its 2022 level, when it ballooned to a 39-year high and prompted a flurry of big BoC rate hikes. The current environment, Reitzes said, is a “different world” to that era – mainly because of the weak growth outlook.
That means a steady stream of rate hikes by the central bank in the coming months remains unlikely for now.
“The likelihood of that resuming or something like that seems pretty low. We don’t have the level of stimulus globally that we had in the economy at that time,” he said. “You don’t have governments around the world pouring money into the economy and the post-pandemic surge in demand.
“We don’t have that type of event coming at this point. It’s more energy-price-driven. And we’ll see how the war in the Middle East goes. It’s just not the same backdrop – and the Bank just wants to make sure that they don’t let inflation take root again and have to deal with broader price pressures and then have to raise rates more aggressively later.”
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