Posthaste: Bank of Canada could put rate hikes on pause after September

Source: Stephanie Hughes, Financial Post

Could the upcoming Bank of Canada interest rate decision in September be the last bump up in the central bank’s current rate hiking cycle? At least one analyst at the Canadian Imperial Bank of Commerce seems to think so.

CIBC’s managing director and head of fixed income, Ian Pollick, said in an Aug. 22 note his team suspects a “narrative shift is coming” and forecasts the bank will put a pause on its rate hiking cycle after hiking 75 basis points on Sept. 7. This would bring the policy rate up to 3.25 per cent, matching the bank’s previous guidance that the benchmark rate could move above neutral at between two to three per cent — a reading that would neither help nor hinder economic growth.

Pollick added that, if his team is correct, the next big shoe to drop would be what happens in October, given the market expects a series of 50 basis point hikes heading into the fourth quarter.

“We anticipate that the September statement will lean towards data dependence rather than outright rhetoric suggesting rates will ‘rise further’ as seen in the July statement,” Pollick said in the note to clients. “For this reason, if we are correct that the bank is entering a period of inertia in Q4, it is very likely that market sensitivity will shift away from central bank signalling and towards data — predominantly inflation, but to a lesser extent growth.”

Despite changing market priorities, Pollick further argued that this would have a minimal impact on flattening yield curves.

The Bank of Canada’s path of rate hikes this year has been relatively aggressive in its aim to stamp out inflation. Though the central bank stayed its hand on increasing rates in January, which drew confusion and criticism from economists at the time, it went on to bring a series of significant rate hikes in subsequent meetings. It wasn’t until March 2 that the bank delivered a quarter basis point hike, bringing the policy rate up to 0.5 per cent. It was also the first rate hike since 2018, and brought in amid concerns over economic fallout from the Russian invasion into Ukraine.

“The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty,” the Bank of Canada said in a statement at the time. “Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth.”

Global supply chain snarls, China’s pursuit of a zero-COVID-19 policy this year, and high levels of federal government spending only fuelled inflation further, dogging the central bank as it battled to bring it under control.

Bank of Canada governor Tiff Macklem acknowledged in late April that the bank had misjudged inflation and pledged to act more “forcefully” to bring it down. More recently, as the rate of inflation dipped from 8.1 per cent to 7.6 per cent in July, Macklem said the Bank of Canada had more work to do to bring inflation down closer to two per cent.