It is the central bank’s eighth consecutive increase in an unprecedented cycle of hikes that began last March when the lending rate stood at 0.25 percent.
Here’s what economists have to say about where rates go from here.
Stephen Brown, Capital Economics
The Bank of Canada accompanied its smaller 25 basis point increase with new guidance that it intends to keep the policy rate at the current 4.5 percent while it assesses the impact of the cumulative rate hikes to date. Although the bank has not completely ruled out future rate hikes, the new guidance reinforces our view that the bank’s next move is likely to be a rate cut, albeit later this year.
We remain (believe) that the bank is underestimating how quickly core (inflation) prices will fall, with our forecasts still pointing to a drop in core inflation to two per cent by the second half of this year. The result is that we remain confident that today’s increase will be the last and we see room for the bank to start lowering interest rates again as soon as the third quarter.
The Bank of Canada raised rates by a further 25 basis points today, but gave some unexpected guidance that this could be the peak for the current cycle. The 25 basis point hike, taking the overnight rate to 4.5 percent, was well-expected by the consensus. The bank pointed to stronger-than-expected growth at the end of 2022, a tight labor market and still elevated short-term inflation expectations as reasons for the policy shift today. However, the statement also pointed to a relaxation in the three-month rates of core inflation, and the expectation that overall inflation will fall “significantly” this year due to energy prices, improvements in supply chains and the delayed impact of higher interest rates.
Possibly as a result of greater confidence that inflation is easing, the bank changed its guidance to state that if the economy develops as it expects, the policy rate will be kept at its current level, although the statement also warned that the bank is willing to increase rates further if necessary. The MPR (Monetary Policy Report) projections for GDP growth are set at one percent this year and 1.8 percent in 2024, which is little changed relative to October, but a little higher than our own forecasts. Therefore, we suspect that the economy will indeed develop in line or even a little weaker than the bank suspects, and that today’s increase in interest rates will indeed be the last one of this cycle.
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James Orlando, TD Economics
The BoC’s first meeting of 2023 appears to be the last in which it will raise its policy rate. Heading into today, the bank communicated that it could go either way with today’s decision – deciding between a final hike or a pause. Given the robustness of consumer spending and employment trends, the BoC clearly felt it needed this last hike to solidify the turn in economic momentum.
Looking at the bank’s forecast, the economy is poised for a consumer-led slowdown, with GDP likely to “stand still by mid-2023.” Greater conviction in this has also led the BoC to lower its inflation forecast. With the belief that the economy is on the way to price stability, the BoC can now step on the sidelines and let its restrictive policies filter through the economy. While it does have the option to rise again should inflation not cooperate, we expect it to keep rates at this level for most of 2023, before lowering them at the end of the year to drive a better balance between interest rates that are too far in restrictive. territory and a weakening economy.