Central bank said it expects growth to stall later this year & early next year & warned more rate hikes will be needed.
The Bank of Canada has announced a smaller-than-expected interest rate hike and made clear more increases were still needed, even as it forecast the economy could soon slip into a slight recession.
The central bank on Wednesday increased its policy rate by half a percentage point to 3.75 percent, a 14-year high but coming up short of calls for another rise of 75 basis points. It has lifted rates by 350 basis points since March, one of its fastest tightening cycles ever.
“This tightening phase will draw to a close. We are getting closer, but we are not there yet,” Governor Tiff Macklem said in prepared remarks ahead of a news conference.
How much higher rates need to go “will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding,” he said.
Macklem added that the central bank was still far from its goal of low, stable and predictable inflation at 2 percent, but was trying to balance the risks of under- and over-tightening.
“It was a bit of a surprise,” Michael Greenberg, portfolio manager at Franklin Templeton Investment Solutions, said of the rate decision. Inflation, he explained, was clearly still a problem and more hikes were likely.
“It just seems like the concerns around the economic fallout and the financial stability fallout of raising rates so aggressively is maybe starting to weigh on them, … and hence they took their foot off the brakes just a little bit,” he said.
The bank said in its quarterly Monetary Policy Report that growth would stall later this year and early next year, which “suggests that a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.”
A technical recession, which consists of two consecutive quarters of negative growth, is possible between the fourth quarter of 2022 and the end of the second quarter of 2023, the forecasts showed.
That darkening outlook likely influenced the decision to go with the 50 basis points hike although the warning that rates still need to rise further “takes a little bit of an edge off”, said Doug Porter, chief economist at BMO Capital Markets.
While the bank said elevated inflation and inflation expectations along with ongoing demand pressures meant that the policy rate would need to go higher, it added new language around how those increases would be determined.
“Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding,” it said.
Inflation has slowed to 6.9 percent in September from a peak of 8.1 percent in June, but increases in the prices of core items, which exclude volatile goods like energy and food, remain persistent. The central bank revised downward its inflation outlook on lower commodity prices and easing supply chain disruptions.
“Inflation is expected to return to the top of the 1 percent to 3 percent control range by the end of 2023 and to the 2 percent target by the end of 2024,” the bank said.
This story originally Appeared on Aljazeera