Could the Bank of Canada raise interest rates again in 2023?

The central bank will aim for a delicate balance in its coming policy announcements, DLC's chief economist says

Could the Bank of Canada raise interest rates again in 2023?

The Bank of Canada struck a “hawkish tone” in its latest policy rate announcement that points to the possibility of another rate hike if the situation calls for it, according to Sherry Cooper, chief economist at Dominion Lending Centres (DLC).

Cooper acknowledged the slowdown in economic activity since late 2022, which has “dramatically reduced” demand since then.

“The output gap–the difference between the actual growth in GDP and its potential growth at full employment–is essentially closed, suggesting that demand pressures have been easing,” she noted. “[The BoC] had previously expected the output gap to close in early 2024.”

At the same time, Cooper is anticipating the central bank to aim for a delicate balance in its coming policy announcements.

“The bank does not want to boost interest-sensitive spending, such as housing and durable goods purchases, by assuring markets that its next move will be a rate cut,” Cooper said.

Coupled with inflation remaining sticky at levels much higher than the BoC’s 2% target, Cooper is expecting the policy status quo to persist for a prolonged period.

“I expect the bank to pause rate hikes for the next six to nine months,” she said. “When they finally begin to ease monetary policy, they will do so gradually, taking the overnight rate down to roughly 4% by the end of next year.”

Elevated inflation likely to persist, BoC head says

Bank of Canada governor Tiff Macklem recently said that further interest rate hikes are still on the table due to sustained inflationary pressures.

“Our 2% target is now in sight… [but] monetary policy still has work to do to restore price stability for Canadians, and we are committed to staying the course,” Macklem said.

Data from Statistics Canada showed that the annualized pace of inflation posted a small drop to 3.7% in September.

“Overall inflationary pressures are persisting and larger-than-normal price increases remain broad-based across the goods and services Canadians buy regularly,” Macklem said.