Rates hike expected at Bank of Canada tomorrow, but is it the right move?
In a recent turn of events, economists are advocating for the Bank of Canada to exercise caution in its monetary policy decisions, as the country grapples with a slowing inflation rate and economic uncertainties.
The Bank of Canada is set to announce its decision on interest rates today, and it is anticipated that the trend-setting rate of interest will be raised by a quarter of a percentage point, bringing it to 4.5 percent. However, some experts are questioning whether another rate hike is necessary, given the current economic landscape.
One of the main concerns is the rapid pace at which interest rates have been increased. Some economists argue that the Bank of Canada may have cut interest rates too quickly and too deeply, potentially leaving policy too loose given the persistence of inflationary pressures. This rapid easing could complicate the effort to control inflation.
Another consideration is the Bank of Canada's target for inflation, which is to keep it within a range of 1% to 3%. Despite current inflation being near the top of this range, recent data suggest that inflation is slowly decelerating, which might support holding off on further tightening.
Forecasts of slow economic growth in 2025 and 2026 could also support holding off on interest rate hikes. Lower growth could necessitate more accommodative monetary policy to support economic recovery.
With interest rates currently at 2.75 percent, near the lower end of the Bank of Canada's neutral range (2.25% to 3.75%), some argue that further cuts might not be necessary, and the focus should be on assessing the effects of current policy before making additional changes.
The Bank of Canada is also cautious due to external factors such as U.S. trade policies and global economic uncertainties, which could affect domestic economic conditions and justify a cautious approach to interest rate adjustments.
Stephen Gordon, a professor of business economics at l'Université Laval in Ste-Foy, Que., notes that the annualized inflation rate over the previous three months is now down to below 4 percent. Gordon states that the real test for inflation will be in the February numbers, because that will be one year since Russia invaded Ukraine, which kicked already-underway inflation into high gear.
Karyne Charbonneau, a financial expert with CIBC, assumes the Bank of Canada is likely to raise interest rates again on Wednesday. However, she also stated that if central banks are wise enough to recognize the delayed effects of what they've currently done, they will not have that much more rate hikes to deliver.
The recent data on Canada's GDP and the recent rise of layoffs make a compelling case for the bank to pause rate hikes in the near term. Almost 200 out of the 300-odd subcategories that Statistics Canada tracks are now in negative territory for the year, including publications, computer and electronic equipment, children's clothing, and shoes.
Despite these considerations, there isn't a strong consensus among financial experts whether another rate hike is in the cards. Investors seem less positive than they have been all year that the Bank of Canada is poised to hike again. Trading in investments known as swaps on Monday suggest the market assumes there is about a 3-in-4 opportunity of a hike on Wednesday.
However, Pablo Villanueva, an economic expert with Swiss Bank UBS, believes the best thing the Bank of Canada could do may just be nothing at all. As demand wanes for products and services, increasingly more products will move into that negative territory, dragging the overall inflation price down with them.
In conclusion, the current context primarily involves discussions about holding off on further rate cuts or evaluating the impact of previous cuts. Some economists are suggesting that the Bank of Canada should hold off on further interest rate hikes despite the current inflation rate for several reasons, including concerns over rapid cuts, inflation targeting, economic growth concerns, interest rate normalization, and uncertainty and external factors. The Bank of Canada will announce its decision on interest rates today, and it remains to be seen whether they will follow the advice of these economists or continue with their current course of action.
The Bank of Canada's decision to raise interest rates today could be reconsidered, as some economists argue that another rate hike might not be necessary, given the current economic landscape and the slowing inflation rate. Economists are also cautioning against raising interest rates too quickly, fearing that it could complicate the effort to control inflation and potentially leave policy too loose given the persistence of inflationary pressures.
