Is Another Bank of Canada Rate Hike Coming?

The odds of Canada’s central bank hiking the overnight rate are rising due to sticky inflation and stronger-than-anticipated GDP growth.

By Josh Sherman | 3 minute read

Monetary policymakers have fought hard to reduce post-pandemic inflation, but the job might require more action.

Just when it seemed like the Bank of Canada (BoC) was through with rate hikes this cycle, the grumblings that there might be at least one more on the horizon are getting louder.

“The Bank of Canada’s job is not finished after it quit hiking too early back in January,” writes Derek Holt, vice president of capital markets economics at Scotiabank Economics, in a recent report. “I think they have more work to do,” he adds. Specifically, Holt suggests that the BoC should raise its overnight rate, which influences mortgages and other loan repayments and currently sits at 4.5%, by another 0.25% as early as its next scheduled announcement on June 7.

From March 2022 to this January, the BoC increased its overnight rate eight times. In doing so, policymakers were trying to bring sky-high inflation — which reached a scorching 39-year high of 8.1%, in June — back down to earth. Low rates, like the historically low level of 0.25% seen during the pandemic, encourage spending, increasing demand for goods and services. In turn, this leads to price inflation, as we explain in a previous Wahi article. Hiking interest rates, on the other hand, quells demand and, over time, inflation.

Despite Past Hikes, Inflation Remains Sticky

By March, the central bank had succeeded in cutting inflation to a more moderate 4.3%. However, the task of restoring inflation to the BoC’s 2% target is proving tougher than some might have expected. In April, the Consumer Price Index (CPI), a measure of inflation that takes into account annual changes in costs for everything from food and housing to education and healthcare, inched back up to 4.4%.

Although TD Economics Senior Economist Leslie Preston expects inflation to continue declining in the coming months, she doesn’t write off the possibility of higher interest rates later this year either. “The BoC needs to remain vigilant to inflation pressures,” she notes in a report, “and may need to hike again if momentum in the domestic economy does not cool as expected.”

Meanwhile, Marc Desormeaux, principal economist, Canadian economics at Desjardins, anticipates a 25-basis-point hike in July, not June. However, he suggests that the effects of previous rate hikes are still working their way through the economy and there’s still time for current trends to change. “We don’t think that we’ve seen the full impacts of interest-rate increases yet,” he tells Wahi, noting there’s typically a six-to-eight-quarter lag between policy action and peak impacts. “There is still likely to be a slowing in Canadian economic activity as a result of sharply higher interest rates in the next few quarters,” he adds.

Other Signs Point to Another Hike

The CPI reversal, however brief, is but one of multiple indicators leading some experts to speculate about more action from the central bank. A strong labour force is another. “Job markets remain very tight,” notes Scotiabank’s Holt. Canada’s unemployment rate remained at 5% in March, while the average hourly wage climbed to $33.12, up 5.3% compared to a year ago. “The unemployment rate has been hovering at near-record lows for five months. That suggests an economy that still has a lot of momentum and all else equal that might be expected to contribute to inflation,” Desormeaux of Desjardins tells Wahi.

The GDP reading for the first quarter of the year, released May 31, further boosts the odds of another rate hike, many market watchers agree. “The GDP numbers are the latest data point reinforcing the strength of the Canadian economy. They suggest that we’re not out of the woods yet on controlling inflation, and we’re now leaning towards a rate hike in July,” says Desormeaux. Canadian GDP, which Statistics Canada describes as an “overall grade on the economic report card of a country or region,” grew by 3.1% on a year-over-year basis for the period from January to March.

According to Benjamin Reitzes, Canadian rates and macro strategist for BMO, the most recent GDP data could indeed be enough to trigger a rate hike on June 7. “[G]iven the strength in the latest GDP data, we wouldn’t be shocked if the Bank opted to hike this month,” writes Reitzes. It is more likely, however, that the BoC stands on the sidelines for one more month before hiking in July. “Our base case is for a continued pause at the June meeting, with the BoC signalling that a July hike is very much on the table if the data remain firm.”