The Bank of Canada has likely made its last overnight rate increase, or at least the last jumbo increase, for some time to come, say economists..A clue for many was the tempered language used in the bank’s statement announcing the latest increase on Dec. 7 and repeated a day later in a speech by deputy governor, Sharon Kozicki..“We indicated that going forward, we will be considering whether to increase rates further. If we are surprised on the upside, we are still prepared to be forceful,” said Kozicki said, much less hawkish than previous bank statements this year..“By that, we mean that we expect our decisions will be more data dependent,” said Kozicki. “But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates.”.Since the first increase in March this year, the bank has increased the rate by 4%, to 4.25%..“Since last March, we’ve taken forceful monetary policy actions,” said Kozicki. “This policy tightening has been affecting the economy,” adding “we are seeing a softening of demand in interest-rate-sensitive areas,” especially housing..“There remains a firmness or stickiness to inflation and to near-term inflation expectations,” said Kozicki, suggesting the bank could be tempted to raise borrowing costs at its next policy announcement on Jan. 25..The bank says a significant number of borrowers who took out variable-rate mortgages are no longer making payments on the principal because their monthly payments only cover the interest. Household consumption decreased in the third quarter, a worry for an economy that has come to rely on housing investment and debt-fuelled spending to power growth..“The largest shifts in spending have been in the most interest-sensitive areas, suggesting our monetary policy actions are working to rebalance supply and demand,” Kozicki said..A lot of economic data will be released before the Jan. 25 announcement, which could influence the decision, including two consumer price index reports, another month of GDP and jobs numbers..CIBC Capital Markets deputy chief economist, Benjamin Tal, believes the bank’s latest increase will be the last for quite some time..“This hike will be followed by a year-long period of rest in 2023 as the Bank of Canada assesses whether inflation was gone for good,” says Tal, adding he believes the bank will leave the rate at 4.25%, before cutting it by October next year.."We would not rule out a final 25-basis-point interest rate hike in January, but the bank is very close to the end of its tightening cycle,” says Stephen Brown, Capital Economics..“The central bank remains committed to fighting inflation but, we are at or very close to the peak in interest rates,” says Charles St-Arnaud, Alberta Central. “As such, the bank signals that whether further hikes are required will depend on incoming data. Our view is the bank is likely done with its tightening, and we believe that interest rates will stay on hold for at least the first half of 2023.”.“The bank’s updated forward guidance features a softer tightening bias than we expected,” says Josh Nye, RBC Economics. “That clearly opens the door to a pause at the next meeting in January, and in our view frames that decision as between 0 and 25 basis points.” “The statement noted that the recent deceleration in core inflation still leaves it above target,” says Avery Shenfeld, CIBC Economics. “We see the overnight rate plateauing at this 4.25% level (and) we expect the Bank of Canada to keep the overnight rate there through 2023, and ease only gradually in 2024.”.Of the Dec. 7 increase, Douglas Porter, BMO Economics says, “The relatively aggressive hike suggests the bank remains acutely concerned about still-high inflation expectations, even amid a clear cooling in domestic demand and some early indications that underlying inflation is losing momentum. In recognition of those latter factors, the bank has opened the door to the possibility that this could be the last rate hike of the cycle. However, we are more concerned that the consensus on the stickiness of underlying inflation and suspect the data will direct the way to one more 25-basis-point hike at the next meeting.”.“We don’t think the bank is done yet, but it is quickly approaching the end of its hiking cycle,” says James Orlando, TD Economics. "We expect the BoC will deliver its final rate hike in January, bringing the policy rate to 4.5%. At that time, it can move to the sidelines, allowing the economy to recalibrate and let inflation continue its downward trend over 2023.”
