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Following Wednesday's interest rate hike announcement, Bank of Canada Governor Tiff Macklem said 'this tightening phase will draw to a close. We are getting closer, but we are not there yet.'Sean Kilpatrick/The Canadian Press

The Bank of Canada has just signalled the beginning of the end of interest rate hikes.

It may not look that way. The central bank raised its policy rate on Wednesday by another half a percentage point, to a 14-year high of 3.75 per cent, and explicitly said “the policy interest rate will need to rise further.”

It certainly won’t feel that way, as borrowing costs jump still higher and holders of variable-rate mortgages take another hit.

But the fact that the bank raised its rate by half a point – not three-quarters of a point, as it did in September, and as financial markets had anticipated again – was the first hint that the tide may have turned. The more the Bank of Canada talked about its decision, the clearer it became that the bank has started to ease off the interest rate pedal, and is setting itself up to ease off some more.

It might even stop raising rates entirely – not yet, but, perhaps, sooner that many experts had thought.

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“This tightening phase will draw to a close. We are getting closer, but we are not there yet,” Bank of Canada Governor Tiff Macklem said in his news conference after the announcement.

Not that long ago, Mr. Macklem mused vaguely about the possibility of taking a “pause” – a time-out to assess the effects of this year’s steep rate hikes before, presumably, stepping back in with some more increases. Now, he’s talking about closing in on the finish line.

Until now, the bank has mostly stressed the need for aggressive rate increases to quash inflation – with the implication being that the bank would err on the side of going a bit too far in order to be certain that inflation was back in its cage. But on Wednesday, Mr. Macklem talked in some detail about “trying to balance the risks of under- and overtightening.”

If you’ve spent any time around central banks, you’ll recognize that these are pretty significant changes in tone. Once the bank starts talking about balancing the risks of under- and overtightening, it’s a signal that the tipping point to overtightening has come into its sight.

The bank’s new economic forecast provides it both space and justification to start talking that way. It envisions essentially zero growth over the final quarter of 2022 and the first half of 2023. That means that for the next three quarters, at least, the economy will be performing well below its capacity – supply will significantly outstrip demand, which is exactly what the central bank is trying to achieve with its rate increases.

The outlook is a good deal weaker than the bank’s previous forecasts, issued in July. That implies that the slowdown that the bank has been trying to orchestrate will be deeper than the bank expected a few months ago, and won’t need much higher rates to achieve the desired goal.

The forecast also suggests that the Canadian economy may very well tip into a contraction – actual declines in gross domestic product – over the next few quarters. The Bank of Canada is reluctant to use the word “recession” (remarkably, it appears only once in the 31-page Monetary Policy Report published in conjunction with the rate announcement), but it is nevertheless increasingly sensitive to the possibility that its rate increases will send the economy into a deep slump. It’s a compelling reason for the bank to be looking for the end point on rate hikes.

Yes, the statement accompanying the rate decision itself stressed that inflation remains far too high (6.9 per cent in September) and that there is still excess demand in the economy. We can take that language as consistent with a bank that insists, as clearly as can be, that it’s not done raising rates.

But we might want to view that message, together with the smaller rate hike, as the first step in a multistage process. That’s how this bank, under Mr. Macklem, has shown a distinct preference to operate.

Dropping to a 0.5 percentage point increase moves the bank one small step away from 0.25 – which is a return to the scale of rate moves in normal times. If expectations for inflation and growth hold, we could see that at the next rate decision, in December.

From there, the bank would give itself a range of options – something it would certainly welcome at this stage. It could slow to raising rates at every other rate decision. It could declare an indefinite pause. It could signal that it believes rates have reached their peak. Alternatively, it could also step its increases back up, if inflation isn’t slowing as expected.

Inflation really remains the big, big wild card here. If price pressures prove stickier than the central bank’s projections foresee – which, given the bank’s track record on predicting inflation over the past year, would be no big surprise – then the bank would have to decide whether a stagnant economy can withstand higher rates, or even needs them, to restore price stability.

But so far, enough is going right for the Bank of Canada to chart a path to ending rate hikes. Despite Wednesday’s increase, that’s something for Canadians to hold onto.

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