On Wednesday (October 26) local time, the Central Bank of Canada announced a 50 basis point interest rate hike, which was lower than market expectations of 75 basis points. The central bank unexpectedly slowed the pace of interest rate hikes as Canada’s economy is on the brink of recession.
After raising rates by 50 basis points, Canada’s policy rate came to 3.75%. The Central Bank of Canada has raised interest rates by 350 basis points since March, in one of the fastest tightening cycles on record for the central bank.
Central Bank of Canada Governor Tiff Macklem said: “The tightening phase is coming to an end and we’re getting closer, but not there yet.” He added that how far interest rates will rise will depend on how monetary policy works. Demand slowing, solutions to supply challenges, and responses to inflation and inflation expectations.
Macklem said the central bank was far from its 2 percent inflation target, but was trying to balance the risks of insufficient and excessive tightening.
The Central Bank of Canada cut its 2023 GDP forecast to 0.9%, while growth at an annualized rate will slow to 0.5% in the fourth quarter of this year.
In addition, the Central Bank of Canada also mentioned the possibility of a recession, with the country’s economic growth stagnating later this year and early next year, between the fourth quarter of 2022 and the second quarter of 2023, with the possibility of a technical recession.
Analysts say the gloomy economic outlook has prompted the Central Bank of Canada to scale back its rate hikes.
Inflation in Canada has fallen to 6.9% in September from a peak of 8.1% in June, but core indicators remain broad and persistent.
Benefiting from lower commodity prices and easing supply chain disruptions, the Bank of Canada lowered its inflation forecast, forecasting that it will return to the top of its 1%-3% control band by the end of 2023 and back to the top of its 1%-3% range by the end of 2024 2% target.
Stephen Brown, senior Canada economist at Capital Economics, said: “The Central Bank of Canada is increasingly confident that the actions it has taken so far will be sufficient to contain inflation, although if it does less than market expectations, the Central Bank of Canada may issue An overly modest signal that it will eventually have to change policy.”
The 50bps rate hike means the Central Bank of Canada joins the RBA, which earlier this month opted to raise rates by 25bps rather than 50bps, taking rates to 2.6%. Officials in both countries are concerned about the impact of higher interest rates on highly indebted households.
In contrast, the Federal Reserve is expected to continue raising interest rates by 75 basis points at next month’s interest rate meeting, but the market is currently expecting the central bank to explore the possibility of slowing the pace of interest rate hikes in December.
