Hefty 50 basis point rate hike expected Wednesday — with overnight rate likely to hit 4.25% early next year
When it comes to this Wednesday's Bank of Canada interest-rate announcement, the options are like choosing between Coke and Pepsi, said one leading economist.
Most market watchers predict the central bank will increase its key overnight rate by 50 basis points, though some suggest it could slow the steady climb of larger hikes with a 25-basis-point bump.
Either way, the Bank is likely to end up settling at the same place soon, with the overnight rate around four or 4.25 per cent by early next year.
After months of increases - the rate started the year at 0.25 per cent and is now 3.75 per cent - there are signs those hikes are starting to have the desired effect of slowing the economy and lowering inflation, but the labour market has remained surprisingly strong, pointing toward a larger hike.
Avery Shenfeld, chief economist of CIBC Capital Markets, predicts a 50-basis-point hike, but said the Bank's messaging will be key. A larger increase could come with a suggestion that there will be a pause in further hikes, while a smaller bump could be coupled with a stronger message of more to come.
The difference would amount to less than two months' of waiting before getting the overnight rate to the same level," Shenfeld said in a report. About as different as Coke and Pepsi."
It takes time for interest-rate changes to work their way into the economy, but economists say the Bank still wants to see evidence that its policies are working to slow the economy before the Bank starts to slow or stop the interest-rate climb.
Factors that point to a larger hike include the fact that growth in Canada's gross domestic product (GDP) came in at 2.9 per cent in the third quarter, almost doubling the Bank's forecast; the economy added far more jobs than expected in October at 108,000 (plus an additional 10,000 last month); and real wage growth has been positive since the spring.
On the other hand, the residential real estate market has already been hit hard by rate hikes. Core inflation, which doesn't include food and energy costs, has also slowed for the past three months (though it remains well above the Bank's target of two per cent and the cost of groceries remains a serious problem for many Canadians).
The full force of the interest-rate hikes to date will probably be felt in the middle to the end of 2023, said James Orlando, senior economist with TD Economics. That creates a tough situation" for the central bank, which has to trust that the big changes it's making now will pay off, he added.
That's why we think they're probably going to go big right now, and after probably the first quarter of 2023, they're going to most likely take a pause and just really see how the economy is able to handle it," Orlando told the Star, adding he expects a 50-basis-point increase on Wednesday.
In a recent speech, Carolyn Rogers, senior deputy governor of the Bank of Canada, acknowledged the pain higher interest rates have already inflicted on some Canadians mortgage holders, a sign the Bank is aware how its policy affects certain swaths of the population, according to Orlando.
Rogers referenced the Bank's own research showing that about 50 per cent of those with variable-rate mortgages with fixed monthly payments (nearly 13 per cent of all Canadian mortgages) have reached their trigger rate," meaning their monthly mortgage payment is covering only the interest and not paying down the principal.
Royce Mendes, head of macro strategy at Desjardins, expects the Bank to go with a smaller raise of 25 basis points this week. He told the Star there are signs the Bank wants to take a more balanced approach" because of the long lags between when it acts and when the economy actually slows.
I think everyone agrees the rate-hike cycle in Canada is closer to the end than to the beginning, but the debate is really about how finely tuned the upcoming rate hikes should be," Mendes said.