The Bank of Canada hiked its benchmark overnight rate by 25 basis points on Wednesday, an anticipated move and one that came with a clear signal the bank is ready to press pause on its aggressive tightening cycle.
Wednesday’s quarter point increase is the eighth consecutive hike and brings the rate to 4.5 per cent, the highest level since December 2007. The central bank said it is ready to pause its current tightening cycle, one of the most aggressive in its history, making it the first G7 central bank to do so as it fights soaring inflation.
“If economic developments evolve broadly in line with the [Monetary Policy Report] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” the Bank of Canada said in a press release.
However, Bank of Canada Governor Tiff Macklem noted in a press conference on Wednesday that "to be clear, this is a conditional pause."
"It is conditional on economic developments coming out in line with our forecast," Macklem said.
"If we do need to do more, if we need to raise interest rates further to get inflation back to target, we will."
The central bank has dramatically hiked borrowing rates as it tries to combat skyrocketing inflation. Since March 2022, the Bank of Canada raised its benchmark rate by 425 basis points, with six of the most recent eight decisions featuring outsized hikes of more than 25 basis points.
The Bank of Canada said in its quarterly Monetary Policy Report released on Wednesday that it expects economic growth to stall through the middle of 2023, something it says will allow supply to catch up with demand. The bank said GDP growth will slow to 1 per cent in 2023. It expects the Consumer Price Index (CPI) to decline significantly this year as the interest rate hikes take hold, falling to around 3 per cent in the middle of 2023 and reaching the Bank's 2 per cent target in 2024.
"There is growing evidence that restrictive monetary policy is slowing activity, especially household spending," the Bank of Canada said.
"As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand."
While recession concerns are on the rise, Wednesday's hike comes as some economic indicators continue to show signs of strength. The Canadian labour market added 104,000 jobs in December, despite an uncertain economic outlook. Inflation in Canada also increased 6.3 per cent in December, a decrease from its peak of 8.1 per cent in June but well above the central bank’s target of 2 per cent.
"We know inflation is still too high and we know that it is affecting Canadians," Macklem said.
"Yes, we're going to have a period of virtually no growth for the next few quarters. But as inflation comes down, the growth will be restored, and it's going to be worth it."
'Way to early' to be talking about rate cuts, Macklem says
While the bank expects growth to stall in Canada, some economists say growth will be weaker than the Bank of Canada predicts, which they say could prompt it to come off the sidelines.
"We expect developments in the Canadian economy to be weaker than the Bank currently does," Desjardins' senior director of Canadian economics Randall Bartlett wrote in a note to clients.
"This suggests to us that the next move by the Bank of Canada is likely to be a cut as inflation falls through the year on the back of a recession starting in the first half of 2023. The cut could come before the year is out, helping spur a rebound in 2024.
Capital Economics economist Stephen Brown also expects that inflation could fall faster than the central bank expects. The Bank of Canada expects inflation will fall to 3 per cent in 2023.
"We continue to [expect] that the Bank is underestimating how quickly core prices will decline, with our forecasts still pointing to a drop in headline inflation to 2 per cent by the second half of this year," Brown wrote in a note to clients.
"The upshot is that we remain confident that today’s hike will be the last and we see scope for the Bank to start cutting interest rates again as soon as the third quarter."
But Macklem repeatedly said at Wednesday's press conference that it is "really far too early to be talking about cuts."
"Inflation is still above 6 per cent. Yes, recent developments have reinforced our confidence that inflation is coming down, but we have a long way to go to get back to our 2 per cent target," Macklem said.
"It's way too early to be talking about cuts."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.