Bank of Canada swerves in ‘game of chicken’ with inflation: What economists say

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The Bank of Canada surprised markets with a 50-basis point hike in its Oct. 26 rate decision, a smaller move than the 75-point hike many economists were anticipating. Its trend-setting policy rate now stands at 3.75 per cent.

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The Bank acknowledged that while inflation is off its peak, it still remains too high. In the accompanying monetary policy report, the central bank is now expecting inflation to cool to three per cent in late 2023 before returning to the two per cent target by 2024.

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Here is what economists say about the surprise move:

Royce Mendes, managing director and head of macro strategy at Desjardins

“In the Bank of Canada’s game of chicken with inflation, central bankers were the first to swerve… The fact that core inflation hasn’t slowed, inflation expectations remain elevated and demand is still outrunning supply, the Bank could have easily justified a larger rate hike. That said, the risk of such an aggressive move apparently outweighed the reward.”

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“As we’ve long said, the Canadian central bank needed to pivot before its U.S. counterpart as a result of the interest-rate sensitivity of the Canadian economy. While the statement leaves open the door to the possibility of another 50-basis-point move in December, expected economic underperformance will likely limit the next hike to only 25 basis points.”

Andrew Grantham, senior economist, CIBC Capital Markets

“The Bank of Canada continued hiking interest rates in an effort to bring inflation back under control, although the 50-basis-point move, to take the overnight rate to 3.75 per cent, was a little less aggressive than the consensus and market had expected (75 basis points was almost fully priced in). The statement and downgraded growth forecasts within the MPR hint at an economy that is losing momentum maybe a little quicker than previously anticipated.”

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“However, even with the weaker growth profile, the Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and as such the statement still suggested that interest rates ‘will need to rise further.’ As such, this may just represent a slightly slower path to the same peak interest rate (4.25 per cent) that we had forecast prior to today’s smaller than anticipated 50-basis-point hike.”

Stephen Tapp, chief economist, Canadian Chamber of Commerce

“I expect the markets will move quickly today to price in a 25-basis-point hike by the Bank of Canada in December, which would take the policy rate to 4 per cent, at which point the Bank can take a breather and wait to see whether core and expected inflation are coming back closer to the 2 per cent target.

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