Bank of Canada Hikes Rates Just Half-Point, Economy Not Strong Enough

Canada’s central bank surprised the market with a weaker-than-expected rate hike. Bank of Canada (BoC) raised the overnight rate 50 basis points (bps), hitting 3.75% — the highest in over a decade. It was double the typical pace, but the increase was still smaller than the market had priced. The central bank confirmed the market’s  suspicion — the economy is weakening.

Bank of Canada Cuts Economic Growth By Half

The BoC aggressively cut its forecast for economic growth. Real gross domestic product (GDP) growth fell to 0.9% points for next year, about half the previous forecast. The BoC also came close to saying they expected a recession, but just fell short. It’s a precarious situation at best.

“This suggests that a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.” read the accompanying release. 

In other words, the central bank expects low growth in a best case scenario. 

Canadian Inflation Expectations Are Falling, Helped By Weak Growth

Despite rates rising at a slow rate, inflation projections are also falling. The BoC’s average inflation forecast fell to 7.1% this year, down 0.4 points. in the previous one. They now see headline inflation hitting target by the end of next year. It appears they’re indicating slow growth will help cool demand.

Bank of Canada Warns This Isn’t Peak, More Hikes Are Coming

Canada is approaching the top of the cycle, but this isn’t the end for rising interest rates, explained the BoC. “The Governing Council expects that the policy interest rate will need to rise further,” wrote the central bank in a release accompanying the rate hike.

Adding that going forward, hikes will be data-dependent. “Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding,” explained the BoC. 

Canadians can expect the coming slowdown to be very different from 2020. Elevated inflation means rates won’t be able to fall and stimulate the economy. Though heavily indebted households are the problem that kept rates low in the first place.