On our way to 4%? What economists say about Bank of Canada’s statement

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The Bank of Canada hiked interest rates 75 basis points on Wednesday, raising the key rate to 3.25 per cent, the fifth consecutive increase since it started tightening in March. The central bank also said more hikes are on the way to tame inflation that continues to be too widespread in the economy.

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Here is what economists are saying about the decision:

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Josh Nye, senior economist, RBC Economics

“Beyond a very clear tightening bias, today’s statement leaned slightly hawkish with the BoC taking little solace in a gasoline price-driven decline in headline inflation in July. It noted core measures continued to move higher and we think that could be the case again in August. While some of the external drivers of inflation (oil and other commodity prices, shipping costs, supply chain bottlenecks) are easing the BoC will want to see core measures moving lower before it pauses rate hikes. Governing Council will also be watching for improvement in the inflation expectations components of its quarterly business and consumer surveys. Worrying trends in the July BOS and CSCE contributed to the BoC’s surprise 100 bp hike later that month, and today’s statement noted short-term inflation expectations remain high. Finally, while Q2 GDP came in softer than expected, the BoC emphasized strong domestic demand and a housing market that is pulling back “as anticipated.” But the economy carried little momentum into Q3, and the bank reiterated its expectation that growth will moderate in the second half of the year — a slowdown that’s needed to bring demand more in line with supply. The BoC is hoping to pull that off without tipping the economy into recession, though getting inflation under control remains its top priority. We continue to expect a mild recession in 2023.”

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Avery Shenfeld, chief economist, CIBC Capital Markets

“The BoC appears ready to sacrifice more growth than we expected to get inflation falling on a faster trajectory, and we’ll be bumping down our GDP projections for Canada in an updated forecast to be released next week. While the Bank could opt for as little as an extra quarter point, had they been convinced that 3.5 per cent was the ceiling, they could have done that move today, so we’ll have to give some thought to whether they’re thinking of a 3.75 per cent rate. That would be a half point above what we had built into our prior GDP call, and therefore somewhat material to the outlook.”

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Benjamin Reitzes, managing director, Canadian rates & macro strategist, BMO Capital Markets

“The policy statement remained very much focused on inflation. Despite the pullback in CPI inflation in July (and a likely further deceleration in August), the Bank’s unease has not let up one bit. In fact, the statement notes that the “data indicate a further broadening of price pressures, particularly in services”, while core inflation “continued to move up”. Services inflation tends to be domestically driven, and that’s exactly where the BoC believes it can have an impact through rate hikes. On the economy, despite the below-expected Q2 GDP report, the economy “continues to operate in excess demand and labour markets remain tight.” The Bank still expects growth to slow in H2, with tighter policy having an impact. Indeed, policymakers want to see a few quarters of below-potential growth and some loosening of labour market conditions before they’ll be more comfortable with the inflation outlook. The concluding paragraph says that the Governing Council “judges that the policy interest rate will need to rise further.” And, they’ll be “assessing how much higher interest rates need to go”. That leaves little doubt that further rate hikes are coming; the only question is how big will the next move be? The door is wide open to allow the data to guide the next decision, but at this point, the tone of the statement remains very concerned about inflation. Bottom Line: We’re penciling in a 50 bp rate hike for the October policy meeting, and will let the data flow over the next seven weeks sway that call either higher or lower depending on the strength/weakness in inflation and growth.”

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James Orlando, director & senior economist, TD Economics

“The Bank of Canada continues to hike rates at a historically aggressive clip. With this latest hike, it has moved the policy rate beyond its estimated neutral range, and into economically restrictive territory. As we highlighted in our report this morning, the Bank has placed focus on the near-term data instead of the likely path of the economy. Given the lags of past interest rate hikes on inflation, we expect the BoC to hike the policy rate to 4.0 per cent by year-end. This implies even more growth sacrifice as the BoC attempts to achieve its goal of price stability.”

Stephen Brown, senior Canada economist, Capital Economics

“The Bank of Canada remains concerned about the risk of high inflation expectations becoming entrenched but, with the economy now slowing sharply and inflation easing by more than the Bank expected, we still see scope for it to follow today’s 75 bp hike with a smaller 25 bp move in October. The 75 bp policy rate hike, to 3.25 per cent, was in line with expectations and means the policy rate is now above the Bank’s 2 per cent to 3 per cent neutral range estimate. The Bank highlighted in the policy statement that it “still judges that the policy interest rate will need to rise further”, but gave very little away about the potential magnitude of any further moves. While the Bank acknowledged that second-quarter GDP growth was “somewhat weaker than the Bank had projected”, it also highlighted the strength of domestic demand. Likewise, while inflation eased by more than the Bank expected in July, the statement focused on the further rise in core inflation. The preliminary estimate of a sharp fall in retail sales in July as well as the trade data this morning, showing a drop in import volumes in July, point to much weaker domestic demand growth this quarter. Moreover, we expect most of the recent upward pressure on services prices to be reversed after the peak summer travel season in September. Providing that the Bank’s next quarterly surveys in early October do not reveal a further rise in long-term inflation expectations, we think this will be enough to cause the Bank to drop down to a 25 bp hike in October, although the risks to our forecast that 3.5 per cent will mark the peak in the policy rate are still titled to the upside.”

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Taylor Schleich, Warren Lovely & Jocelyn Paquet, National Bank Economics

“While there was an especially large range of outcomes going into today’s meeting, the headline decision came out as expected. Nonetheless, we’d consider this statement to be on the hawkish end of the spectrum. The Bank poured cold water on the “pause” narrative as they made it clear that rates will need to rise further still. How much further has intentionally been left open to debate, but do we sense a bit more of a ‘data dependent’ tone (“we will be assessing how much higher interest rates need to go”). Consistent with rates now being in restrictive territory, we’d expect a downshift in the pace of policy rate increases ahead. For now, the debate is likely to be centred on 50 basis points for the next meeting (i.e., anywhere from 25 bps to 75 bps appears to be on the table compared to 50 bps to 100 bps today). Incoming data (most importantly will be two CPI reports) should have a significant influence on the late-October decision but the focus here will be core/services inflation as they’ll be looking through any relief brought on by falling gas prices. We’ll reserve final judgment on our expected path for policy until we hear from Senior Deputy Governor Rogers tomorrow but clearly, the Bank does not intend today’s hike to be its last. As they reiterated today, the BoC is ‘resolute’ in their commitment to price stability, and they’ll do what it takes to get inflation back to 2 per cent. For now, prices are anything but stable, which has meant decidedly purposeful policy decisions.”

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Randall Bartlett, senior director of Canadian economics, Desjardins

“Another monster hike in September supports the Bank’s narrative that inflation is top of mind and it will do whatever it takes to vanquish it. And if there are any cracks in its resolve, good luck finding them anywhere in today’s press release. That said, the implications for the Canadian economy are starting to show up in spades. Inflation looks to have peaked and is expected to trend lower as monthly prints converge to more typical levels. While commodity prices tell a big part of this story, easing global supply chains and softening demand for goods also play their part. In that context, real GDP growth was soft in May and June, and Statistics Canada’s flash estimate suggests it will contract in July. Indeed, we’re tracking Q3 real GDP growth of around 1 per cent annualized, shy of the Bank’s forecast for the second consecutive quarter. A big part of this story is the ongoing housing market correction, whose broader economic impacts will become more evident as rates continue to rise. Looking ahead, the Governing Council’s job is going to get a lot harder. Economic growth is clearly slowing, and sustained monetary policy tightening is only going to exacerbate this. Indeed, we’re anticipating that the Canadian economy is going to fall into a mild recession in the first half of 2023, largely as a result of the ongoing correction in the Canadian housing market.”