In December, the Bank of Canada raised its overnight rate for the seventh consecutive time, taking it to 4.25%, the highest since 2007..At the December announcement the bank signalled it was prepared to put an end to the hikes at its next scheduled decision date, which is Wednesday, depending on economic data released prior to the date..The most important data is the rate of inflation, which dropped to 6.3% in December, down from its peak of 8.1% last summer..The drop has most of those in the finance industry saying the bank’s move on Jan. 25 will be an increase of .25%, after which the bank will put the brakes on hikes late into the spring, or longer..Royce Mendes, Desjardins managing director and head of macro strategy said, even with the drop of the inflation rate last month, the labour market is still hot and underlying inflation pressures are still "sticky."."I think (the bank will) use all of that to justify the further rate increase," Mendes told Bloomberg..The unemployment rate dropped to 5% in December, barely above the all-time low of 4.9% but Mendes said core measures of inflation, excluding more volatile items such as food and gas, edged down only a bit last month..Mendes said he expects this will be the last increase raise for now, however, Canadians shouldn't be too confident that interest rates won't rise further.."The Bank of Canada needs to make sure that it has done enough to put inflation back on a path towards the 2% target. And that's not clear just yet," he said..TD director of economics James Orlando said even if the bank has intentions to put rate increases on hold, it can't appear to be backing off too much, adding his expectations are the bank will say it doesn't foresee the need for more rate hikes and it will closely monitor how economic conditions evolve, keeping the door open for further increases, should it feel the necessity.."Obviously, if things get out of hand, then they might have to raise rates again," he said. .Senior economics lecturer at Concordia University, Moshe Lander is in the large group predicting a .25% increase.."Given how much Canadians have been through already in 2022, the bank might lay off a little and only increase the overnight rate by 25 basis points, to send a mild signal that its work is not done and accompany it with a message that more hikes will come in 2023." .Carl Gomez, chief economist with CoStar Canada, doesn’t believe the Bank will continue its rate hikes into 2023. .“The bank is likely to tolerate one more big rate increase, to maintain its credibility on inflation, but with the full impact of past rate hikes not fully felt, and the potential for the economy to slip into a moderate but increasingly deeper recession, the bank is likely very close to pivoting and holding rates steady," he said..The rate hikes have already slowed the housing market considerably and are expected to affect the economy more broadly with time. Businesses and consumers facing higher borrowing costs will pull back on spending, thereby reducing demand in the economy and easing upward pressures on prices..Yet up until now, economists say much of the decline in inflation has been caused by things outside of the bank's control, such as lower energy prices. .Paul Betts, president of GAP Marketing says, “The reported inflation number is in the mid 6% range but that was driven by lowered energy costs while food, housing, services, clothing etc. remains higher than 10%.”.Betts concurs that businesses and consumers will pull back on spending..“Not to be too negative, there is something that I believe will happen as a trend rather than a fad,” he says. “Low- and middle-class families will adopt a new lifestyle and be perfectly happy with what they need and not worry so much about what they want.”.That would mean the full brunt of interest rate hikes has yet to be felt, said Mendes, adding the bank is trying to balance the risks of raising rates by too much or too little.."It's a very difficult balancing act," he said.
