MNI BOC WATCH: Macklem Hikes 50BPs And Considers Need For More

Canada’s central bank raised its key lending rate half a point to 4.25% Wednesday, the seventh straight move to the highest since 2008, and policy makers removed a firm pledge to keep hiking with the economy seen stalling.

"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," Bank of Canada officials led by Governor Tiff Macklem said in a statement from Ottawa. "Governing Council continues to assess how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding."

Investors expected an increase but were split about a quarter or a half point decision. The Bank's statement mixed comments about high inflation and an overworked economy against its view growth is stalling out through the middle of next year. While past rate hikes are slowing domestic demand the risk of entrenched inflation is growing, the Bank said. "We are resolute in our commitment to achieving the 2% inflation target and restoring price stability," the statement said.

The Bank’s last of eight scheduled decisions for 2022 wraps a year where rate hikes bucked the economist consensus four times, reflecting surging inflation as Covid restrictions faded, wonky supply chains and Russia's invasion of Ukraine. Most economists see Canada’s rate cycle finishing soon around 4.25% followed by a pause through most or all of 2023 as growth falters.

With the Bank slowing hikes after July’s record 100bp move and signaling a more balanced inflation outlook, how far and fast it moves now rests on whether inflation becomes persistent and if a recession creates slack holding down prices. Most economists see a recession as relatively mild.

The Bank's overnight rate began the year at 0.25% and the first move of a quarter point in March lagged a run-up of inflation to around 8%, quadruple the Bank’s target. Canada's tightening at times was the most aggressive in the G7 and this move restores the BOC as having the highest borrowing costs in the group. 

The Bank sets rates to keep inflation in the middle of a 1%-3% band and return to target within two years, and price gains have already topped 2% since March of last year. Officials have said that 2% CPI inflation won't be restored until the end of 2024. 

More hints about the path of rates may come in a "report card" speech and press conference to be given by Deputy Governor Sharon Kozicki Thursday in Montreal.

Recent data shows the Bank has more work to do on inflation, which held at 6.9% in the latest report. Last week's GDP data showed 2.9% annualized Q3 expansion, almost double the Bank's forecast, while unemployment moved back towards a record low in November and nominal wage gains remained near the strongest since the 1990s. The Bank today also pointed to core inflation measures hanging around 5%. 

"Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum," the Bank said. "However, inflation is still too high and short-term inflation expectations remain elevated. The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched."