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Canada Monetary Policy July 2023

Canada: Bank of Canada hikes rates in July

On 12 July, the Bank of Canada (BoC) raised the target for the overnight rate from 4.75% to 5.00%, and announced it was continuing to reduce the stock of outstanding government bonds.

The decision to hike was driven by the economy performing stronger than the Bank had expected, signs of persistent excess demand, a renewed uptick in the housing market and core inflation which is still running well above the Bank’s 2% target. Moreover, the BoC revised up its inflation forecasts, and now only sees inflation returning to target in mid-2025.

In its press release, the Bank did not give any explicit forward guidance, but hinted that it would be willing to hike more if required to tame inflation.

The BoC’s next policy announcement will be on 6 September.

On the outlook, Goldman Sachs analysts said:

“We now expect that the data flow will induce the BoC to deliver one more 25bp hike at its October meeting for a 5¼% terminal rate, but a hotter-than-expected data dashboard could lead to a final hike in September instead.”

Desjardins’ Randall Bartlett was more dovish:

“Looking to the next meeting in September, the door isn’t shut to another rate hike. That said, we continue to believe that this will be the final rate hike for this cycle.”

TD Economics’ Rishi Sondhi took a similar view:

“Where does policy go from here? The onus is on the incoming data, which we think will show enough weakness over the coming months for policymakers to remain on hold for the next few quarters. We’re already seeing signs that job markets are softening, with vacancies well below prior peaks, the unemployment rate on the rise, wage growth beginning to moderate.”

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