Bank of Canada Raises Benchmark Rate to 2.5%, Economists Expect Further Tightening
The Bank of Canada hiked its benchmark lending rate by 25 basis points to 2.5 per cent, prompting investors to scale back expectations for a December increase. Economists from CIBC, Desjardins, and Capital Economics anticipate further tightening, though views differ on the timing and total number of remaining hikes.
The Bank of Canada increased its benchmark lending rate by 25 basis points to 2.5 per cent, a move economists described as tough and forward-looking. The decision was aimed at guarding against energy-driven inflation becoming a more widespread problem.
Following the announcement, investors significantly scaled back their expectations for another increase this year. Market bets for a December rate hike dropped to 55 per cent from 100 per cent prior to the decision.
CIBC economist Andrew Grantham stated that the hike was intended to prevent elevated energy prices from turning into a widespread inflationary issue. CIBC predicts the central bank will skip a December rate hike but raise rates again in January to 2.75 per cent.
Royce Mendes, head of macro strategy at Desjardins, described the decision as reducing the risk of a painfully aggressive tightening cycle later. While market swap data showed December hike odds falling to 55 per cent, Desjardins characterizes the chances of a December move as 50-50. Both CIBC and Desjardins expect one additional rate hike.
Capital Economics economist Bradley Saunders noted that the balance of risks tipped towards energy-driven inflation over downside risks related to trade tensions. Capital Economics is currently calling for two more rate hikes.
The Bank of Canada forecasts headline inflation of 3.4 per cent in the fourth quarter and 2.6 per cent in the same period next year, keeping it above the two per cent target through next year.