Possibly BoC has done with hiking rates at the current rate of 4.25%. The Bank of Canada said as much at the end of its last rate statement that the Governing Council, ‘Will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target’. The decision saw a 50bps hike, which money markets had not fully priced in, but the forward guidance was dovish, so that offset any hawkish response in the CAD. So, what are the snag points for the BoC, and where does it go from here?

The growth & inflation outlook

The BoC expects Canada’s growth to stall into the first half of next year. So, that argues for the BoC at peak rates. However, inflation remains very firm as highlighted running into the event on the weekly workshop. The BoC notes that the longer that ‘businesses and consumers expect inflation to be above target the greater the risk that inflation becomes entrenched’. Entrenched inflation will keep the BoC hiking.

It’s all about inflation… still

So, let’s summarise. The BoC sees a recession in Canada and one in the US, wants to slow down hiking rates, but inflation risks becoming entrenched, so it can’t. Money markets now see the BoC on hold for its next meeting with a 62% chance of a no-change rate decision on January 25. See here for part of the very helpful Financial Source’s interest rate tracker.

Going forward we have inflation data out on December 16 for the CAD and any big beats in inflation data will likely move markets to anticipate a greater chance of the BoC hiking rates in January. However, this is tilting more and more towards a stagflationary environment for Canada, so it would make sense that any rallies higher find sellers as long as this outlook remains.