Bank of Canada slows down rate hikes

The Bank of Canada unexpectedly slowed its pace of rate amid fears that the economy is flirting with a recession. The base rate was raised by Chairman Tiff Macklem by 50 basis points, compared to the three-quarters of a percent expected by markets and most economists.

Since the key rate increased, the Bank of Canada was able to outperform its competitors back in July. As Australian and Canadian officials share concerns about the impact of higher borrowing costs on highly indebted households, the Bank of Canada is teaming up with Australia's central bank.

Traders still expect the US Federal Reserve System to raise rates by 75 basis points next week. However, as central banks all around the world are nearing the end of the tightening cycle, policymakers are hopeful that the cumulative effect of their efforts will soon begin to show in inflation data.

By raising rates below consensus forecasts, the Bank of Canada's policy decision reinforces the idea of ​​a more general reversal of central bank policy, according to Allianz SE's chief economic adviser, Mohamed El-Erian.

Tiff Macklem said that the tightening cycle is coming to an end, but despite this fact, we can safely expect a rate hike. According to the chairman, the tightening cycle is already coming to an end, but has not yet been reached.

As Evercore ISI analysts Peter Williams and Krishna Guha write in a note, both countries Canada and Australia have housing-market finance models. These financing patterns make these economies vulnerable to rapid rate hikes.

There is still hope that inflation will ease in the coming months, due to the sharpest increase in interest rates in decades, which will affect the economy.

At a press conference in Ottawa, Tiff Macklem said that high interest rates are already beginning to affect the growth of the economy. This is increasingly evident in interest-sensitive areas such as housing and spending on expensive goods.

The Bank of Canada lowered its GDP growth forecasts, predicting that economic growth will stall and possibly even contract in the coming months. Because higher borrowing costs curb spending. Inflation is expected to drop sharply to 3% or even lower by the end of 2023 for the first time since early 2021.

There is a risk that inflation may not return to its normal levels, undermining Bank of Canada’s credibility with households and businesses.

According to Benjamin Reitzes, rate and macro strategies at BMO Capital Markets, the central bank is trying to manage inflation without putting too much pressure on the Canadian economy. The analyst hopes that this situation does not turn against them in 2023 in case inflation remains stickier than initially expected.