Canada: Bank of Canada hikes rates by 25 basis points in January
On 25 January, the Bank of Canada (BoC) raised its target for the overnight rate from 4.25% to 4.50%, and announced it was continuing to reduce the stock of outstanding government bonds.
The rate hike was justified by excess demand and inflation which is still over double the upper bound of the Bank’s 1.0–3.0% target range. However, headline and core inflation have declined notably from their mid-year peaks. Together with the Bank’s belief that inflation would “come down significantly” in 2023, this underpinned the decision to raise rates by a smaller amount; at the previous two meetings, the BoC hiked by 50 basis points.
In its press release, the Bank stated that it would leave rates at their current level going forward, but was prepared to hike further if needed. This is in line with our panelists, who see rates unchanged in the coming months before some mild monetary easing in late 2023.
The BoC’s next policy announcement will be on 8 March.
On the outlook, Desjardins’ Randall Bartlett said:
“We anticipate the Bank of Canada to remain on hold for the foreseeable future. In fact […] we expect developments in the Canadian economy to be weaker than the Bank currently does. This suggests to us that the next move by the Bank of Canada is likely to be a cut as inflation falls through the year on the back of a recession starting in the first half of 2023.”