MNI STATE OF PLAY: BOC Hikes 75, Will Mull How Much More To Go

The Bank of Canada raised its key lending rate 75 basis points to 3.25% Wednesday and said policy makers will start debating how much higher borrowing costs need to rise in an economy facing the risk of entrenched inflation and slowing growth.

“The policy interest rate will need to rise further," Governor Tiff Macklem said in a statement. "As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target."

The hike was expected by 20 of 23 economists surveyed by MNI with three seeing just 50bps, and several said informally that a repeat of July’s 100bp move couldn’t be ruled out. While Canada's rate is now the highest since 2008, a year when it peaked at 4.25%, it began this year at a record low 0.25% and the first 25bp move in April lagged a run-up of inflation to around 8%, quadruple the Bank’s target.

Besides shifting debate to a potential end of the rate cycle, the statement toned down language about an economy that remains in excess demand instead of moving further into overheated territory. The global and Canadian outlook is now also seen as in line with projections after repeated prior upward forecast revisions. 

The Bank still laid out a case for inflation to remain above target for a while, downplaying a slowing of inflation to 7.6% from the highest in decades at 8.1% and saying core rates remain uncomfortable. "Short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched," the Bank said.

"The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target," the Bank said Wednesday, echoing its last decision. There is no press conference today but a speech and media availability comes Thursday with top deputy Carolyn Rogers.

Today's statement made no reference to whether the Bank still sees it as possible to move rates a little bit past a neutral rate of 2%-3%, a question that may emerge for Rogers. 

Canada has the G7’s highest policy rate, though the Fed could catch up later this month. Among major economies China’s rate is higher than Canada’s, though the PBOC has been cutting amid slowing growth. Canada's decision could set up a month of hawkish meetings. Some ECB officials ahead of their decision Thursday have signaled they would like to see a 75bp move, the BOE has a decision the following week and the U.S. and Japan meet later this month.

The BOC signaled Canada's economy has solid domestic momentum at a time when some economists see a mild recession next year, with policymakers pointing to Q2 GDP growth of 3.3% annualized and a needed slowdown in hot housing markets. 

Divisions over future rate increases hinge around whether a wage-price spiral is brewing, how much money saved up during Covid shutdowns is left for households to spend, and whether a weak global economy drags Canada down. The Bank's July projection said inflation may stay at around 8% for a few months and exceed the 2% target until the end of 2024, longer than its two-year horizon for restoring normalcy.