The Bank of Canada hiked its benchmark overnight rate by 50 basis points on Wednesday, its seventh consecutive increase, as the bank signals its aggressive tightening cycle may be coming to a close.
Wednesday’s increase brings the key rate to 4.25 per cent, the highest level since 2008. A slim majority of economists had expected a 50 basis point increase, according to Bloomberg, while markets had already priced in a 25 basis point hike.
Canada’s central bank has sharply hiked borrowing costs this year in one of its most aggressive tightening cycles in its history, bringing the benchmark rate from 0.25 per cent in March to its current rate of 4.25 per cent. The bank’s last six decisions, including Wednesday’s, have featured outsized hikes of more than 25 basis points.
But a shift in language may signal that the central bank is readying to take its foot off the gas pedal when it comes to interest rate hikes.
This is a pivotRoyce Mendes, managing director and head of macro strategy, Desjardins
The Bank of Canada had repeatedly said in previous rate decisions this year that “the policy interest rate will need to rise further” as it continues to try to tame soaring inflation. On Wednesday the central bank changed that language from its policy statement, a signal that it may be the beginning of the end for this tightening cycle as the economy shows signs of slowing.
“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” the central said in a statement released alongside its policy decision.
The shift in language "introduces some uncertainty" as to what comes next from the Bank of Canada, managing director and head of macro strategy at Desjardins Royce Mendes wrote in a research note on Wednesday. "This is a pivot," Mendes wrote.
"The Bank of Canada is moving to a more data dependent reaction function. Upcoming readings on the labour market, inflation and the central bank’s own surveys will dictate whether there’s more to come."
Demand in the economy pulling back, but not enough
Still, the 50 basis point hike shows the central bank's fight to tamp down inflation is not over.
"They continue to worry about inflation becoming entrenched and that's what this rate hike is really about," Mendes said.
The Bank of Canada cited stronger-than-expected GDP growth in the third quarter and a tight labour market in its statement-only decision, saying that "the economy continued to operate in excess demand." But the Bank also noted that "there is growing evidence that tighter monetary policy is restraining domestic demand."
"Consumption moderated in the third quarter, and housing market activity continues to decline," the bank said.
"Overall, the data since the October (Monetary Policy Report) support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year."
BMO Capital Markets chief economist Douglas Porter wrote in a research note that the relatively aggressive hike from the Bank of Canada suggests it "remains acutely concerned about still-high inflation expectations, even amid a clear cooling in domestic demand and some early indications that underlying inflation is losing momentum."
"The Bank has opened the door to the possibility that this could be the last rate hike of the cycle," Porter said.
"However, we are more concerned than the consensus on the stickiness of underlying inflation, and suspect that the data will direct the way to one more 25 basis point hike at the next meeting."
In October, the Bank revised its economic growth forecast and said it expects GDP growth will slow to between zero and 0.25 per cent through the end of 2022 and the first half of 2023. Several economists predict that a recession will hit in the first half of 2023 as soaring inflation and rising interest rates weigh on consumer spending, the housing market and labour force participation.
While inflation has slowed from the peak reached in June, it is still well above the central bank’s target of two per cent. Consumer prices rose another 6.9 per cent in October, fuelled by higher gas prices and rising mortgage interest costs.
Big banks hike prime rates
Canada's biggest banks are raising their prime lending rates in response to the Bank of Canada's rate hike.
Royal Bank of Canada (RY.TO) and TD Bank (TD.TO) were the first among the country's Big Five banks to announce increases to their prime lending rates, followed by the Bank of Montreal (BMO.TO), Scotiabank (BNS.TO) and CIBC (CM.TO). Each bank says it will raise its prime rate by 50 basis points, from 5.95 per cent to 6.45 per cent. The change goes into effect from Thursday.
The prime rate is the annual interest rate that banks and financial institutions use to set interest rates for loans and lines of credit. Since the Bank of Canada began increasing its benchmark rate in March, the prime rate at Canadian banks has jumped from 2.45 per cent.
The increase means more people with variable-rate mortgages and fixed payments will hit their trigger rate. Before the rate hike, roughly half of homeowners with a variable-rate mortgage with a fixed payment reached their trigger rate, according to the Bank of Canada. With a 50 basis point hike, the number could rise to 65 per cent of homeowners.
Most variable-rate mortgages in Canada have static monthly payments, meaning the payment will remain the same even as interest rates change. Trigger rates are activated when the interest portion exceeds the payment itself, and it's a trend that has become more widespread amid the sharp jump in interest rates this year.
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.