Wednesday's 75 basis-point rate would lead to Canada’s highest interest rates since 2008. So, borrowing costs are likely to reach the level of economic slowdown.
Regulators across the world are putting the brakes to stop a post-pandemic inflation surge. The Reserve Bank of Australia (RBA) raised the interest rate by half a percent Tuesday, followed by Banco Central de Chile that stunned investors with a 100-basis-point hike. The European Central Bank (ECB) is poised to raise rates by 75 basis-points. In addition, the U.S. Federal Reserve meeting is planned in September, which may also mark a 50-basis-point rise.
Most economists see Macklem's drastic tightening as the right thing to do since Canada's economy is still overheated. Job openings are at record highs, while unemployment hit a record low. Wages are growing as workers demand more compensation for real income cuts, which could lead to a spiral in wages and prices.
Inflation, in turn, showing signs of peaking, reached a 7.6% level, nearly four times the central bank's target. With major indicators rising, odds are good that underlying price pressures could still take root, pushing Macklem and his officials to further monetary tightening.
"It may take some time to curb inflation," the governor said in an article after Statistics Canada reported a slight slowdown in overall inflation. "We must proceed till inflation hits a 2% target.”
Most analysts expect more hikes. "At this point, central banks still need to remain extra vigilant," said Royce Mendes, head of macro strategy at Desjardins Securities. "The Bank of Canada probably won't surprise markets with any dovish signals."
However, other hawkish comments cannot be ruled out. While Toronto-Dominion Bank forecasts a 75-basis-point hike, securities strategists led by Andrew Calvin estimate a 25% chance of a second full percentage point tightening, compared to a 10% risk of a 50-basis-point increase.
There is emerging evidence of rate growth having adverse effects on the business environment. While the economy showed strong growth through the first half of 2022, manufacturing has largely stalled since May as housing markets across the country suffer from rising mortgage costs. Some economists forecast a recession next year.