MNI BOC WATCH: Market Split On 25BP Hike As Cycle Nears An End

The Bank of Canada will raise its policy rate for a seventh straight meeting Wednesday, with inflation set to remain above target for another two years and economists split over whether Governor Tiff Macklem will hike by another half-point or slow to 25 bps.

A 50-bps increase would take the policy rate to 4.25%, around where most economists see the cycle high and the highest since January 2008, whereas 25 bps would be the smallest increase since tightening began in March. Either way, with Canadian officials joining global peers in warning of the danger of recession and pointing to risks from either over- or under-tightening, the statement will be scrutinized for any suggestion the cycle is ending this week or early next year.

Some of those hints could be held over for a "report card" speech and press conference to be given by Deputy Governor Sharon Kozicki Thursday in Montreal. Canada is seen as unusually vulnerable to higher rates because of a heavily leveraged housing market. (See: MNI INTERVIEW: BOC Pausing Soon To Assess Lags- Ex-Adviser)

Four of the last eight regular BOC meetings have produced out-of-consensus policy changes, as inflation surged to four-decade highs. Hikes diverged from economist views in October when Macklem raised by 50 instead of the expected 75, and in July when he hiked a full percentage point rather than 75. The Bank also held at a record low 0.25% in January when economists were divided over a hike or a hold.

Eleven economists surveyed by MNI say the 3.75% overnight rate will climb to 4% at the decision due at 10am EST Wednesday, with the other 10 predicting 4.25%.

Macklem has said both that rates must rise further and that the end of the tightening cycle is drawing near. Unlike his Federal Reserve counterparts, he has not pointed to a specific cycle peak, though earlier this year he speculated he could stop hiking just beyond a neutral level estimated from 2% to 3%. The policy rate remains negative versus some measures of inflation expectations.

APPROACHING THE PEAK

Recent data shows the Bank has more work to do on inflation, which held at 6.9% in the latest report, closer to June's four-decade high 8.1% than the BOC's 2% target. 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.

Interest rates rates “have further to go” Macklem told reporters Nov 10. “That could be another bigger than normal step or it could be reverting to more normal twenty-five.” There has been some early evidence trend inflation is moderating but “we’re still in excess demand, that’s still putting upward pressure on inflation,” he said.

Former advisers have told MNI the more compelling price trend comes from slowing in some monthly and quarterly CPI data. Those figures suggest inflation returns to 3% late next year, in line with the Bank's view and putting price gains back within its 1% to 3% target band. (See: MNI INTERVIEW: Steady CPI Dents 50BP BOC Hike Case- Ex Adviser)

Decelerating prices could be also lose some momentum from what the central bank anticipates to be a mild recession, alongside a global economy also on the brink of slowing. This week's decision will the last to come without published minutes, with the Bank moving to provide those notes following its January meeting.

Bank of Canada policy rate