The Bank of Canada on Wednesday raised its key interest rate by 50 basis points to 4.25% – its highest level since 2008 – and signaled a possible pause in the aggressive tightening cycle it has undertaken earlier this year.
Since March, the central bank has raised its key rate seven times in a row in an effort to slow inflation and economic activity.
“Going forward, the Governing Council will assess whether further raising the policy rate is necessary to bring supply and demand into balance and inflation on target,” the Bank of Canada said in a statement. .
The language marks a change from previous announcements, in which the bank said more rate hikes would be needed.
In a note to clients, CIBC’s chief economist, Avery Shenfeld, argued that “the Bank of Canada gave its rate hike team a yellow card.”
In its press release, the Bank of Canada said there were “more signs” that higher interest rates were dampening demand in the economy.
“Consumption moderated in the third quarter, and activity in the housing market is slowing further,” the central bank said.
The Bank of Canada added that economic data released since its October interest rate decision supported its forecast that growth would stagnate through the end of the year and the first half of 2023.
At the same time, the bank pointed out that inflation remained too high and short-term inflation expectations remained elevated.
In October, annual inflation was 6.9%, well above the Bank of Canada’s target of 2.0%. However, economists noted that annualized three-month inflation had eased to less than 4.0%, suggesting that inflation is headed in the right direction.
Forecasters were split on whether the Bank of Canada would go for a quarter- or half-percentage-point rate hike ahead of Wednesday’s decision. Market watchers were also unsure whether the central bank would continue to raise interest rates in the new year.
CIBC now expects the Bank of Canada to suspend rate hikes, but keep its key rate high at 4.25% until 2024.
“While the tightening cycle has likely reached its zenith, we will need the pain of these higher rates to persist for some time to dampen economic growth and thus calm inflation,” Shenfeld said.
The Bank of Canada will announce its next interest rate decision on January 25th.