CIBC on the level of the BoC's next rate hike

CIBC outlines both likely and implausible scenarios

CIBC on the level of the BoC's next rate hike

A 50-basis-point hike in the Bank of Canada’s next policy rate announcement today, coupled with a promise of more upward adjustments to come “seems implausible,” according to CIBC Capital Markets.

This is because the central bank remains uncertain that a terminal rate above 4.25% will be necessary to tame inflation.

“We are only just getting into the period in which the data will capture the squeeze on those hitting trigger rates on variable mortgages, and fixed rate mortgage renewals at higher rates will be an unfolding story right through the coming year,” said Avery Shenfeld, chief economist at CIBC Capital Markets.

The Canadian economy saw a 2.9% annualized increase in its gross domestic product during the third quarter, defying the central bank’s expectations of a 1.5% gain.

However, domestic demand was much weaker, with housing investment (down by 15.4%) and consumer spending (down by 0.3%) being significant factors in the deceleration, Statistics Canada said.

“Slim gains for September and October monthly GDP are in line with our expectations for very limited growth in Q4,” Shenfeld said.

Is a moratorium on rate hikes possible?

What Shenfeld described as “the most dovish option” – a 25bp hike followed by a statement that no more upward adjustments will be coming – is also equally unlikely.

“If the bank was now quite sure that 4% was the ceiling, it wouldn’t have been that sure that a further hike was coming when it lifted the target to 3.75% only weeks ago,” Shenfeld said. “Even if 4% ends up being the peak, it would make more sense to leave the door ajar for a further hike until the bank has its next [monetary policy report] forecast, since we are still at a near-record-low jobless rate with evident pressure on wages.”

CIBC is anticipating the central bank to implement a 50-bp hike that will incorporate cautious language (such as the word “may”) when it comes to the possibility of further hikes.

“That would be followed by a decision to leave rates on hold at the first meeting in 2023 should Q4 growth signals look sufficiently soft,” Shenfeld said. “A day when you’re hiking a full 50 basis points, which requires a stern message about inflation to justify that move, might not be the best day to formally announce a pause.”