Bank of Canada Flashes Inflation Battle: What Economists Are Saying

The half point walk surprised markets

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The Bank of Canada surprised markets with a 50 basis point hike in its Oct. 26 interest rate decision, a smaller step than the 75 point hike many economists had anticipated. The leading policy rate is now at 3.75%.

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The Bank acknowledged that although inflation is off its peak, it is still too high. In the accompanying monetary policy report, the central bank now expects inflation to cool to three percent by the end of 2023, before returning to the two percent target by 2024.

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Here’s what economists are saying about the surprising move:

Royce Mendes, General Manager and Head of Macro Strategy at Desjardins

“In the Bank of Canada’s game of chicken with inflation, the central bankers were the first to swerve… The fact that core inflation has not slowed down, inflation expectations remain high and demand still exceeds supply had Bank can easily justify a higher interest rate hike. That said, the risk of such an aggressive move apparently outweighed the reward.”

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“As we have long said, the Canadian central bank had to turn ahead of its US counterpart due to the interest rate sensitivity of the Canadian economy. While the statement leaves the door open to the possibility of another 50 basis point move in December, economic underperformance likely to limit next increase to just 25 basis points.”

Andrew Grantham, senior economist, CIBC Capital Markets

“The Bank of Canada continued to raise interest rates in an effort to bring inflation back under control, although the 50 basis point move to bring the overnight rate to 3.75% was somewhat less aggressive than consensus and market expectations. (75 basis points was almost fully priced in). The statement and the lowered growth forecasts in the MPR point to an economy that may be losing momentum a little faster than previously expected.”

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“But even with the weaker growth profile, the Bank stated that its preferred metrics for inflation are not yet showing meaningful signs of easing, and as such the statement still suggested that interest rates ‘need to rise further’. As such this is may simply represent a slightly slower path to the same peak interest rate (4.25 percent) that we had forecast ahead of today’s smaller-than-expected increase of 50 basis points.”

Stephen Tapp, Chief Economist, Canadian Chamber of Commerce

“I expect the markets to move quickly today towards a price in a Bank of Canada increase of 25 basis points in Decemberwhich would bring the key rate to 4 percent, after which the Bank could take a breather and wait for core inflation and projected inflation to get closer to the 2 percent target.

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