Will the Bank of Canada continue to hike rates after 2023?

BMO Global Asset Management exec weighs in on the possibilities

Will the Bank of Canada continue to hike rates after 2023?

The Bank of Canada’s rate hikes have likely reached their stopping point this year, according to Earl Davis, head of fixed income and money markets at BMO Global Asset Management.

This is mainly because the hikes over the past year and a half have yet to take full root in the Canadian economy.

“We don’t foresee any hikes in 2024,” Davis said in an interview with BNN Bloomberg. “That speaks to the lag – give it a little bit of time to see the lag.”

At the same time, while Davis maintained that “2023 is the end of hikes,” sticky inflation will keep rates elevated for the foreseeable future.

“Rates are going higher because (the Bank of Canada) said they need to fight inflation and ensure inflation stays down,” Davis said. “Unfortunately, the only tool that they have to do that is interest rates.”

Still, the possibility of more hikes for the rest of this year remains, particularly considering the recent spike in the annual inflation rate.

“That is one of the things that underscores our call for at least one more hike, possibly two,” Davis said, while also assuring that “the economy is alright, and I think it will continue to do alright for 2024.”

“The number one thing that we’re looking at is employment, not economic growth, and that’s where the difference comes in. That’s why we're not seeing the pullback yet. For us to change our call to say maybe there’ll be an ease in 2024, we have to see the unemployment numbers going higher, and we're not seeing that.”

BoC assures that it will avoid pitfalls of over- and under-tightening

In its recently released summary of deliberations made during its September 6 policy rate announcement, the central bank said that it remains cautious in its approach to its policy rate, and that it will continue to be on the lookout for evidence that its rate hikes are now enough to rein in annual inflation levels.

Freezing the policy rate at 5% balances “the risks of over- and under-tightening,” the BoC said. “Economic data showed clearer indications that policy was gaining traction and demand was slowing, and [Governing Council] recognized that the economy will still feel some further impact from past policy tightening.”

However, “given the uncertain path forward for core inflation, tighter policy should remain a potential option until [the BoC sees] convincing evidence that slowing demand is translating into reduced core inflationary pressures,” the central bank added.