Bank of Canada may slow rate hikes

Tiff Macklem, governor of the Bank of Canada, said there could be at least one more sharp rise in interest rates before the magnitude of hikes begins to decline. The rate of increase could fall to steps of 25 basis points. However, Macklem himself can’t say with certainty how big the increase will be. 

With analysts still assessing the impact of rather aggressive interest rate hikes, such statements from Tiff Macklem are sure to raise questions about the bank's ability to slow the pace of hikes.

The bank of Canada officials are expected to receive up-to-date inflation data within the week, and quarterly GDP data by the end of November. This will form the basis of discussions on December 7 during the next Bank of Canada meeting. 

At the upcoming meeting, an interest rate decision will also be announced. The market had previously expected an interest rate of 4.5%, but the figure dropped to 4.25% as price pressures in the U.S., according to traders, are less than expected.

According to Macklem, there is still excess demand in the Canadian economy, and with it, inflation is rising. In order to decrease the inflation rate, the Canadian labor market must be balanced. At the moment, officials are in the process of developing a plan that would help find a middle ground between too much and too little tightening of financial conditions. Macklem stresses that it won't be easy, but officials will try to make the change with the least inconvenience for workers and businesses.

More job openings and higher wages could indicate that the labor market is overheated. For now, however, Macklem says there is no need to worry because wage growth has stabilized and the Bank of Canada has reported that high, worrying employment levels have begun to decline gradually. 

It’s worth noting, despite the fact that in October more than a dozen thousand new jobs appeared in Canada, unemployment remained unchanged at 5.2%. Macklem pointed out that job growth was necessary to increase supply and balance demand, but such methods aren’t able to fully replace monetary policy methods to curb demand.

The bank needs to see how people adjust to higher borrowing costs in a situation with numerous jobs. At the moment, the number of vacancies in the manufacturing and construction sectors is starting to decline, these sectors feel the impact of rates more than others.

Amid declining U.S. inflation, the Bank of Canada is expected to raise interest rates by 50 basis points during its December meeting with a 30% chance.