Could BoC hike interest rate policy above aggregate 3%?

The Bank of Canada is widely expected to decide one more big interest hike on Wednesday in its endeavour to fight inflation which is currently near forty year high and closer to the 2% target.

All 31 economists surveyed by Bloomberg expect policy makers led by Governor Tiff Macklem to raise the benchmark overnight rate by at least 50 basis points, and most say it will be 75 basis points. That would bring the policy rate to 3.25%, the highest among major advanced economies.

After a big 100 bps rate hike in July, markets expect the BoC to deliver a 75 bps hike to 3.25% at its September meeting. Analysts think the BoC will slow down the pace of its hikes beyond September, only taking the policy rate to 3.75% by the end of Q4-2022, although investors see the risks as remaining slanted to a higher peak.

Investors and traders are busy debating how much higher Canada’s benchmark lending rate needs to move. Some economists believe a pause in rate increases is looming, with signs of cooling inflation amid heightened risks for slowdown and even recession. Others believe that additional but smaller hikes will be necessary to keep pace with the US Fed’s stance.

The BoC will have its monetary policy meeting on Wednesday. A rate hike of 75 basis points is expected. Analysts think the BoC will slow down the pace of its hikes beyond September, only taking the policy rate to 3.75% by the end of Q4.

The BoC has embraced one of the more aggressive policy tightening among the G10 countries, and there are some hints the effects of tighter monetary policy might be starting to cool inflation down.

Headline inflation in Canada decelerated to a 7.6% year-over-year pace in July, driven by falling commodity prices. However, the average of three core inflation measures ticked up to 5.3%, indicating that underlying price pressures still remain elevated for now.


Markets will be particularly interested in guidance on future policy from the BoC, especially against a backdrop of slowing growth and still-elevated inflation.

Investors will be looking for clues on whether more will be coming in October, amid discussion that the hiking cycle — one of the most aggressive in the bank’s history — may be near its end. Officials have already raised the key rate to 2.5% from 0.25% in March in what they termed a front-loading effort, starting with a standard quarter-point move and ramping up to a surprise 100-basis-point jolt in July.