Today, the Bank of Canada increased its overnight benchmark interest rate 50 basis point to 4.25% from 3.75% in October. This is the 7th time this year that the Bank has addressed inflation and means the policy rate is now as high as it has been in 15 years.

We summarize the Bank’s observations below, including its forward-looking comments on the need/likelihood of future rate increases below:

Canadian inflation

• CPI inflation remained at 6.9% in October, with many of the goods and services Canadians regularly buy showing large price increases
• Measures of core inflation “remain around 5%”
• Three-month rates of change in core inflation have come down, “an early indicator that price pressures may be losing momentum”

Canadian Economic and housing market performance

• GDP growth in the third quarter was stronger than expected, and the economy continued to operate “in excess demand”
• The labor market remains “tight” with unemployment near historic lows
• While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter
• Housing market activity continues to decline
• Data since the October Monetary Policy Report supports the Bank’s outlook that growth will essentially stall” through the end of this year and the first half of 2023

Global inflation and economic performance

• Inflation around the world remains high and broadly based
• Global economic growth is slowing, although it is proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report
• In the United States, the economy is weakening but consumption continues to be solid and the labor market remains “overheated”
• The gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events

Outlook

Although the Bank’s commentary noted that price pressures that are driving high inflation may be losing momentum, it went on to say that inflation is “still too high” and that short-term “inflation expectations remain elevated.” In the Bank’s view, the longer that Canadian consumers and businesses expect inflation to be above the Bank’s 2% target, “the greater the risk that elevated inflation becomes entrenched.”

Given these economic signals, the Bank’s Governing Council stated that it “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”

It concluded its statement with a familiar refrain: “We are resolute in our commitment to achieving the 2% inflation target and restoring price stability for Canadians.”

Analysts and commentators will seek to interpret those outlook comments for signs that the Bank has reached or believes it is close to reaching the terminal point in its current rate-hike cycle. For now, that remains a question of debate and speculation that will turn on future economic signals.

Next Touchpoint

January 25^th is the next BoC interest rate announcement.  I hope it is a 0.25% increase and then holds there for all of 2023. We will see…