The Bank of Canada is expected to increase interest rates further.
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The Bank of Canada is set to announce the conclusions of its latest policy deliberations on January 25th at 10:00 AM Eastern Time. The prevailing expectation is that Governor Tiff Macklem will approve a quarter-point interest rate increase, bringing the benchmark rate to 4.5 per cent – representing the most aggressive series of rate hikes in the central bank’s history.
The decision rests on a complex interplay of economic signals. While headline inflation has slowed – with year-over-year increases averaging 6.7 per cent in the fourth quarter – core inflation measures, excluding volatile elements like gasoline prices, remain stubbornly high. These persistent core inflation figures, averaging 5.3 per cent year-over-year, reflect continued demand pressures and lingering effects from contracts signed when inflation was peaking last year.
Economist David Rosenberg, a widely respected Bay Street analyst and contributor to the Financial Post, believes the Bank of Canada and its peers have already raised interest rates too aggressively. Rosenberg’s assessment echoes a growing concern that further rate hikes could trigger a recession, given the substantial level of household debt accumulated during the years of ultra-low interest rates, primarily fueled by the housing market. If Macklem and his deputies share Rosenberg’s assessment, they will likely be reluctant to further increase borrowing costs.
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The Bank of Canada’s decision to lift interest rates aggressively in December, responding to unexpectedly strong economic data, effectively cut off any chance of a pause. At that time, year-over-year increases in the consumer price index averaged 7.1 per cent in the fourth quarter. Policymakers had been assessing whether demands for goods and services was outstripping the Canadian economy’s ability to keep up—leading to inflation. However, the data since December don’t appear to have satisfied the Bank of Canada’s own criteria for a pause.
The key question is whether inflation is definitively heading back to the central bank’s target of two per cent. The stickiness of core prices, and evidence that a significant number of businesses and consumers expect price pressures to continue, suggest that inflation could remain elevated before it reaches that target.
There’s a compelling argument for pausing rate increases. Elevated levels of household debt, combined with the years of ultra-low interest rates, make the Canadian economy exceptionally sensitive to higher borrowing costs. This could lead to prolonged economic pain as household spending slows. However, the data since December don’t appear to have satisfied the Bank of Canada’s own criteria for a pause.
Ultimately, the Bank of Canada’s decision will depend on a balanced assessment of the incoming economic data. Governor Macklem’s dashboard will be scrutinized for definitive evidence that inflation is trending back to the target, or indications that the economy’s sensitivity to higher borrowing costs is diminishing. The upcoming data will largely dictate the direction of monetary policy.
