Canada's Bank expected to boost interest rates once more on Wednesday - is this a prudent move?
In a surprising turn of events, the Bank of Canada is expected to keep its policy interest rate steady at 2.75% for the foreseeable future, according to a consensus among financial experts. This decision comes after the bank held the rate at 2.75% on July 30, 2025, citing ongoing uncertainties around U.S. tariffs, a resilient Canadian economy despite trade disruptions, and inflation close to the 2% target but with underlying pressures[1][3].
The recent data on Canada's GDP and the rise in discharges suggest a weaker economy and a possible recession. However, the bank seems to be in a "wait and see" mode rather than expecting another interest rate hike in the near term. The focus remains on monitoring inflation, economic resilience, and external trade uncertainties before considering further adjustments[2].
While a majority of financial experts expect another hike, Pablo Villanueva of Swiss Bank UBS believes the bank could do nothing[2]. This is supported by the fact that almost 200 out of the 300-odd subcategories that Statistics Canada tracks are now in a negative inflation rate for the year, including publications, computer and electronic equipment, children's clothing and shoes[4].
Investors are betting real money that the winds of monetary policy might be blowing in a different direction soon, as the one-in-four possibility that there won't be an interest rate hike on Wednesday is the first time that figure has been anything less than a certainty since the bank began hiking last February[5]. If the rate hike occurs, it will be the eighth consecutive time the bank has raised its benchmark rate[5].
Despite the rate hikes, inflation is still twice as high as the bank's preferred ceiling, at 6.3 percent last month[6]. Stephen Gordon, a professor of business economics at l'Université Laval in Ste-Foy, Que., notes that the annualized inflation rate over the previous three months is now down to below 4 percent. A year ago, it was over three times that[6].
Karyne Charbonneau, a financial expert with CIBC, assumes the Bank of Canada is likely to raise the interest rate again on Wednesday, but she believes there probably isn't another hike coming after that[1]. Villanueva shares this view, suggesting that the weaker economy and inflation outlook could give the Bank of Canada confidence to hold off on further hikes in the near term[2].
It generally takes between six months to a year and a half for the full impact of rate hikes to be felt[4]. The real test for inflation will be in the February numbers, as that will be one year since Russia invaded Ukraine, which kicked already-underway inflation into high gear[4].
In the meantime, consumer debt, including credit card debt, is at record levels as Canadians struggle to adjust to higher prices[4]. Average housing costs are down by 20 percent since February[4].
In conclusion, the Bank of Canada is taking a cautious approach, focusing on the overall health of the economy and inflation before making any further decisions on interest rate hikes. The focus remains on monitoring the situation closely and making informed decisions based on the data at hand.
The Bank of Canada's focus on monitoring inflation, economic resilience, and external trade uncertainties indicates a cautious approach towards making further decisions about interest rate hikes, despite the ongoing rate hikes and high inflation rates. Pablo Villanueva of Swiss Bank UBS suggests that the weaker economy and inflation outlook could give the Bank of Canada confidence to hold off on further hikes in the near term.
