Bank of Canada slows the pace of interest rate hikes

The Bank of Canada is expected to decide to raise the overnight interest rate at a meeting. This time the increase will be less than the previous one, it’s expected to be 50 basis points.

The forthcoming increase is indicative of the trend of smaller interest rate hikes. If at the first meeting it was raised by 100 basis points, at the next meeting, this summer, the increase was 75 basis points.

However, it’s worth considering the possibility of an economic downturn. The survey data indicate a 50% chance of a recession occurring within 1-2 years, while at the beginning of the summer the probability was on average 10-15% lower.

Royal Bank of Canada senior economist Josh Nye said that the pace of rate hikes could slow down, although there are several factors preventing it. For example, the Fed's rather tough policy, the weakness of the currency, and rising inflationary expectations. These factors can affect the decision of the Bank of Canada in such a way that there will be a rate increase by 75 basis points.

On the other hand, many analysts tend to believe that the rate will slow down, and at the end of this year and early next year they expect an increase no more than 25 basis points. Thus, the overnight interest rate could be 4.25%.

Canada's inflation rate is currently 7%. Despite the slowdown, the Bank of Canada's 2% inflation target isn’t expected to be reached until the third quarter of 2024. It’s unlikely to meet the target inflation at this moment.