Reactions to the Bank of Canada's interest rate hike today: ‘We don’t think the BoC is done yet’

The Bank of Canada on Wednesday hiked its benchmark overnight interest rate by 50 basis points to 4.25%, the highest level in almost 15 years, and signaled the tightening campaign was near an end.

That took markets somewhat by surprise. Prior to the 10 am ET announcement, money markets were pricing in 62% odds for a smaller 25 basis point hike. Late last week, they had been pricing in as much as a 90% probability of a smaller move. However, economists were divided on whether the BoC would move by 25 basis points or 50.

The Canadian dollar reacted by strengthening nearly a quarter of a cent against its U.S. counterpart, and Canadian bond yields rose - although that simply retraced a move lower in yields this morning prior to the announcement.

The Bank of Canada has now raised rates by a breathtaking 400 basis points this year. It continues to cite strong growth and tight labour markets as it tightens monetary policy in an effort to bring down inflation.

However, the bank is dropping hints the rate hiking cycle is nearing its end. In Wednesday’s announcement, it eliminated the forward guidance it has previously used that said rates would have to rise further.

“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,” the bank said.

Investors and markets are now wondering whether the Bank of Canada has made its final rate hike during this cycle. Money markets are pricing in a 62% chance that there will be no change in rates in January when the bank will make its next decision, according to Refinitiv Eikon data. In fact, they are pricing in little change in the bank’s overnight rate over the course of next year, with small odds that rates may start dropping as soon as next October.

Here’s how Street analysts and economists are reacting to the decision:

Avery Shenfeld, chief economist with CIBC:

“The Bank of Canada flashed a yellow card on its rate hiking team, by sounding more cautious about its willingness to press on to even higher interest rates in 2023 even as it tightened today. ... We still see the overnight rate plateauing at this 4.25% level, but unlike what financial markets have been presuming in the last couple of weeks as bond yields tumbled, we expect the Bank of Canada to keep the overnight rate there through 2023 and ease only gradually in 2024. While the tightening cycle likely has reached its zenith, we’ll need the pain of these higher rates to persist for a while to stall economic growth and thereby cool inflation. While the market hadn’t fully priced in a 50 basis point move, the reaction to the larger hike will be tempered by the hint that a pause might be in the offing.”

Taylor Schleich and Warren Lovely, senior economists with National Bank Financial:

“Today’s decision was always bound to be a surprise to many given how evenly split the 25 vs. 50 bps rate hike debate had been leading up this meeting. While the Bank opted for the more aggressive option, the statement reads dovishly to us. For one, there was an acknowledgement that core inflation momentum is waning. But more importantly, the Bank is no longer flagging that the policy rate will need to rise. To us, there’s a good chance that this hike will be the Bank’s last. Of course, that will be dependent on how inflation and the economy evolve over the coming weeks/months but, in our outlook, the Bank will not need to adjust rates any higher. To that effect, we’ll have lots of data to digest before the Bank’s January meeting, including two CPI reports and a Business Outlook Survey offering an update to inflation expectations. We’ll see if our dovish interpretation of today’s statement is confirmed tomorrow when Deputy Governor Sharon Kozicki delivers a speech and holds a press conference. Tiff Macklem’s fireside chat next week will also be key to keep an eye on. The Bank’s first policy meeting of calendar 2023 will take place on January 25th.”

Stephen Brown, senior Canada economist with Capital Economics:

“The Bank of Canada delivered a somewhat dovish 50 bp policy rate hike today by softening its explicit forward guidance that interest rates will need to rise further. We would not rule out a final 25 bp interest rate hike in January, but the Bank is very close to the end of its tightening cycle. ... For now, we assume that the resilience of the labour market and a desire not to send too dovish a message will cause the Bank to enact one final 25 bp hike in January. But with Canadian oil prices tumbling below $50 in recent days, almost 40% lower than the Bank assumed in its October Monetary Policy Report, it would not be a complete surprise if today marks the last hike in this cycle.”

James Orlando, director and senior economist with TD:

“We don’t think the BoC is done yet, but it is quickly approaching the end of its hiking cycle. As all Canadians know, the rapid rate hikes over 2022 have caused a dramatic adjustment in the real estate market, and we are starting to see this in consumer spending data. We expect this to continue to weigh on the economy over 2023 as the lagged effects of past hikes filter through. We expect the BoC will deliver its final rate hike in January, bringing the policy rate to 4.5%. At that time, it can move to the sidelines, allowing the economy to recalibrate and let inflation continue its downward trend over 2023.”

Douglas Porter, chief economist with BMO Capital Markets:

“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. ...

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.”

Derek Holt, head of Capital Markets Economics at Scotiabank:

“You could argue that they took the first step to sounding more cautious with their forward guidance at the October meeting and built upon that today. Instead of “will need to rise further” alongside conditional language around future hikes after this one, they are now “considering” whether to hike again after today’s 50bps which sounds a little less decisive. It’s not, in my opinion, a quantum shift. That language closes the door to further hikes a touch more than what they had already intimated in the October statement but nevertheless leaves it open. ...Overall I think they did the right thing here given what we know to this point. Slamming the door shut by declaring an absolute end to the hike cycle would have been too aggressive in my view and as the policy rate pushes further into restrictive territory they should be transitioning toward something that is more sensitive to new information.”