On Wednesday, the Bank of Canada announced a 50 basis points increase in its benchmark interest rate, which pushed it to the highest it has been in the last 15 years.
However, the monetary authority also signaled that the unprecedented campaign of monetary policy tightening could be close to its end.
The hike
There has been a record increase in the interest rate in the last nine months, as it has gone up by 400 basis points to reach 4.25%.
It was back in January 2008 that the overnight interest in Canada had been at this level and the central bank has been forced to do so in order to fight inflation.
As far as the latest increase is concerned, the central bank said that the labor market remained tight and growth also remained strong.
However, the forward guidance that the Bank of Canada had been using since it started tightening its monetary policy back in March was finally eliminated.
It dropped language that indicated there would be further interest rate hikes. Economists said that the tightening cycle may have come to an end, but the high rates would continue to persist.
After all, the central bank is aiming to cool inflation and slow down economic growth, which would only happen if the rates continue to remain high.
Money markets had been betting on an interest rate increase of about 25 basis points, but there were some who had been expecting a 50 basis points increase.
Other numbers
The bank said in its announcement that the growth in the gross domestic product in the third quarter had still been stronger than expected, as it was an annual 2.9%.
It also said that the economy still had a lot of demand and the labor markets were also quite tight. However, the central bank said that data was in support of its forecast in October.
It had indicated that growth would come to a halt sometime in the middle of 2023. The bank said in its statement that the Governing Council would consider if they need the interest rate to increase further for returning inflation to their target and balance demand and supply.
Inflation
The bank also asserted that inflation in the country is still too high, as it hit 6.9% back in October. This means that it is at least three times the target of the bank of 2%.
However, there has been a decline in the core inflation’s rate of change in three months and this shows that the momentum of price pressures might be falling.
Money markets had priced at a peak interest rate of 4.43% in this tightening cycle, which was about 7 basis points higher than the decision announced by the bank.
This indicates that there is a chance of another increase of 25 basis points in price in markets. Economists said that the Bank of Canada had shown a dovish stance this time around.
A hike in the interest rate by half a percentage point and softening guidance all indicate that it is turning dovish.
Nevertheless, it does not mean that another smaller 25 basis points increase cannot happen in January. The guidance makes it quite clear that the bank is close to ending its tightening cycle, but another small increase could happen.