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Canada Monetary Policy December 2022

Canada: Bank of Canada hikes rates by 50 basis points in December

On 7 December, the Bank of Canada (BoC) raised its target for the overnight rate from 3.75% to 4.25%, and announced it was continuing to reduce the stock of outstanding government bonds.

The decision aimed to curb inflation, which is still over double the upper bound of the Banks 1.0–3.0% target range despite having declined from its mid-year peak. Core inflation is roughly double the upper bound. High near-term inflation expectations, the tight labor market and excess domestic demand were likely additional factors behind the hike.

Forward guidance grew more dovish, with the Bank stating that it “will be considering whether the policy interest rate needs to rise further”; at the prior meeting the BoC clearly stated it expected rates to rise. This suggests the end of the tightening cycle could be near. The Consensus is for rates to peak at around 4.3% in mid-2023, with forecasts for the peak rate ranging from 4.25% to 4.75%. Monetary easing is on the cards for late 2023.

The BoCs next policy announcement will be on 25 January.

Giving their outlook, analysts at the EIU said:

“We expect that the BoC will pause its tightening cycle after an additional 25-basis-point increase at its next meeting in January, at a peak rate of 4.5%. If inflation and growth data released in the coming months are above the central bank’s expectations, further rate increases are possible.”

Scotiabank analysts are more dovish:

“The Bank of Canada is signalling a pause as it waits to assess the impact of its policy actions on inflation and growth. This is in line with our previous forecast, and we continue to expect that the BoCs next move will be a cut late in 2023 given the expected slowing in both inflation and growth.”

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