The Bank of Canada raised interest rates by 25 basis points to 4.5% at its January meeting and signaled it would pause rate hikes. While the Bank of Canada noted that the economy was developing in line with expectations in its monetary policy report, it also noted that short-term inflation expectations remained elevated despite a moderation in inflation. The annual rate of core inflation is still around 5%.
Given this, our bank still expects the Bank of Canada to hike rates one last time by 25bps in March, to a terminal rate of 4.75%, and then stay on hold for the rest of 2023. However, the inflation path and inflation pressure are still the key to the decision on the March interest rate meeting. If there is a convincing decline in inflation before the March interest rate meeting, then the January rate hike will be the last time the Bank of Canada raises interest rates.
