EconoFACTS

December 07, 2022 | 10:49

BoC 50 bp Rate Hike — Semi-Finals

Economist

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

Douglas Porter , CFA

Chief Economist and Managing Director
Economics

Douglas Porter has over 30 years of experience analyzing global economies and financial markets. As Chief Econom... (Read more)

The Bank of Canada raised its key overnight lending rate 50 bps to 4.25% today, the seventh consecutive hike and bringing this year's cumulative rate hike to 400 basis points. This latest move was a bit more than many expected, but was not a major surprise—we looked for a 50 bp move, while consensus and market pricing was almost evenly split between a 25 and 50 bp hike (with a slight bias to 25), after the 50 bp effort in October. Beyond the rate hike itself, equally important was the messaging on possible future moves, and the tone here was definitely on the mild side. Dropping any suggestion that rates still need to go higher, the Bank indicated that this could possibly be the last move (depending on the data, of course).

The key statement was: "Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target." (Emphasis ours.)

The three factors that the Bank suggested would inform their decision whether to keep hiking or not were:

"...assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding." So, not surprisingly, the keys to watch will be the strength of the economy (notably GDP and jobs), supply chains pressures, and core inflation.

Thus, from having been split on this decision, the consensus and markets will now debate the chances of a move at the January 25 decision, and it's already seen as a close call. At this point, we would stick with our call of a terminal rate of 4.50% with one final 25 bp hike next month.

The Bank explained today's mildly aggressive move by noting the resiliency in the global economy and the U.S. consumer, the stronger-than-expected Q3 GDP in Canada, as well as the still-tight domestic labour market. It did approvingly note the calming in the three-month trend in core inflation (3.7% a.r. on ex food & energy—watch this space in the CPI release two weeks hence). As well, the Bank allowed that the rate hikes to-date are "restraining domestic demand", the key factor behind its mild message on future moves.

Bottom Line: Today's relatively aggressive hike suggests that 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 than the consensus on the stickiness of underlying inflation, and suspect that the data will direct the way to one more 25 bp hike at the next meeting.