The Bank of Canada is widely expected to deliver its seventh consecutive interest rate hike at its rate decision announcement this week.

What’s less certain is the size of the move, with markets and experts split between a 25- or 50-bps increase.

“Policymakers have done little in recent weeks to provide any clarity here, and economic data has been yielding mixed messages,” economists from National Bank of Canada wrote in a recent research note.

“Stronger-than-expected jobs and GDP growth along with still-hot inflation contrasts with a rapidly deteriorating housing market, weak household consumption and forward-looking indicators suggesting inflation relief is coming,” they added.

An additional hike will bring the Bank’s overnight target rate to either 4.00% or 4.25%, and imply a prime rate of 6.20% or 6.45%—a level not seen since 2007.

“The Bank of Canada has some choices to make in the coming week, but the most likely options on its menu are about as different as Coke and Pepsi in terms of what they would mean for the economy,” CIBC economist Avery Shenfeld wrote in a note. “So, unless you’re sure about the kind of cola that Governor [Tiff] Macklem prefers, you can’t be that confident about the outcome of the December rate-setting decision.”

What is certain is that the Bank of Canada is currently in the winding-down phase of its current rate-hike cycle, which each future rate decision from here on out becoming increasingly dependent on economic data.

The following is a collection of comments and analysis pertaining to the BoC’s upcoming rate decision on Wednesday:

On the size of the hike:

• CIBC: “We’ve stuck with our call for a 50 basis point move, but [for] the language of the statement no longer guaranteeing further hikes ahead.”
• RBC: “The Bank of Canada won’t hit the brakes on interest rate increases next week, but it is likely to slow them down. And we believe next week’s increase could be the last in this cycle.
• BMO: “We remain comfortable with our call for a 50-bps hike next week, with the combination of the surprisingly healthy Q3 GDP report earlier this week and a steady job report supporting that option.” (Source)

On what happens after this meeting:

• Desjardins: “There’s no doubt that the Bank of Canada’s aggressive rate-hiking cycle is closer to the end than it is to the beginning. It has to be. The economy simply can’t take much more of this… If the Bank of Canada is truly committed to balancing the risks of under- and over-tightening, central bankers would be wise to raise rates only 25 bps next week and move to a more data-dependent stance. We expect the data will deteriorate enough that policymakers won’t hike rates anymore after that.”

On future rate cuts:

• National Bank of Canada: “The haste of the tightening, together with the lag time for transmission of policy-rate moves to the economy, makes it normal for observers to be nervous. Alas, we will know only after the fact whether the Bank went too far. One thing is certain: we can now see a marked slowing in real estate entailing an extremely rapid deflation in that market. To calm inflation, in our view, it will not be necessary to keep interest rates high for long and we accordingly expect the central bank to ease substantially in the second half of next year.” (Source)

On what the BoC is expected to say

• National Bank of Canada: “We could see them highlight that policy is now definitively restrictive and potentially suggest that they’ll need some time to assess the impacts of 2022’s rapid tightening phase…headline inflation remains miles above the Bank of Canada’s 2% target and the economy is still overheating. But that’s not enough to conclude that the Bank of Canada needs to raise rates significantly more.”
• “

On inflation data:

• RBC: “There are tentative signs that broader inflation pressures have peaked. And these have emerged even before the full impact of earlier rate hikes on the economy has been felt. It takes time, for example, for higher interest rates to feed through to household mortgage payments as fixed-rate contracts are renewed. Governor Macklem in October highlighted the need to balance the risks of both under- and over-tightening monetary policy—and the economic growth backdrop is widely expected to deteriorate. Our outlook foresees a moderate recession in the first half of next year.”

On GDP data:

• ScotiaBank: “The strong upside surprise to GDP growth in Q3 keeps Canada’s economy pushing further into excess demand conditions which stymies the Bank of Canada’s efforts to cool inflationary pressures…A cooling economy likely lies ahead and the monthly GDP figures are suggesting this is just beginning to happen. The new information likely means that the risk of downshifting the pace of rate hikes in December has gone down and a 50bps hike is looking more likely given the positive surprise.” (Source)
• Desjardins: “Third quarter GDP data revealed that the housing market was once again a significant source of weakness…Consumer spending on durable goods, including automobiles and furniture, also continued to pull back in Q3. Those two sectors of the economy are the most exposed to higher interest rates since purchasers tend to employ leverage when buying. For Canadians who own businesses or work in these sectors, this is awful news. But for the Bank of Canada, this is a win. It means that its past rate hikes are working exactly as intended.”

The following are the latest interest rate and bond yield forecasts from the Big 6 banks, with any changes from their previous forecasts in parenthesis.

	Target Rate: Year-end ’22	Target Rate: Year-end ’23	Target Rate: Year-end ’24	5-Year BoC Bond Yield: Year-end ’22	5-Year BoC Bond Yield: Year-end ’23
BMO	4.25% (+25bps)	4.50% (+50bps)	3.75%	3.85% (+25bps)	3.45% (+25bps)
CIBC	4.25%	4.25%	3.00%	NA	NA
NBC	4.25% (+25bps)	3.75% (+25bps)	3.00%	3.40% (-15bps)	3.15% (+20bps)
RBC	4.00%	4.00%	NA	3.45% (+10bps)	2.95%
Scotia	4.25%	4.00%	3.00%	3.90%	3.55%
TD	4.25%	3.25%	NA	3.70%	2.55%

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