By Julie Gordon and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada announced a smaller-than-expected interest rate hike on Wednesday and made clear more increases were still needed, even as it forecast the economy could soon slip into a slight recession.
The central bank increased its policy rate by half a percentage point to 3.75%, a 14-year high but coming up short on calls for another 75 basis points move. It has lifted rates by 350 basis points since March, one of its fastest tightening cycles ever.
“It was a bit of a surprise,” Michael Greenberg, portfolio manager at Franklin Templeton Investment Solutions, said of the rate decision. Inflation, he added, was clearly still a problem and more hikes were likely.
“It just seems like the concerns around the economic fallout and the financial stability fallout of raising rates so aggressively is maybe starting to weigh on them … and hence they took their foot off the brakes just a little bit,” he said.
The bank, in its quarterly Monetary Policy Report, said growth would stall later this year and early next year, which “suggests that a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.”
A technical recession, two consecutive quarters of negative growth, is possible between the fourth quarter of 2022 and the end of the second quarter of 2023, the forecasts show.
That darkening outlook likely guided the decision to go with 50 basis points, though the warning that rates still need to rise further “takes a little bit of an edge off,” said Doug Porter, chief economist at BMO Capital Markets.
While the bank said elevated inflation and inflation expectations, along with ongoing demand pressures meant the policy rate would need to go higher, it added new language around how those increases would be determined.
“Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding,” it said.
Inflation has slowed to 6.9% in September from a peak of 8.1% in June, but core measures remain broad-based and persistent. The central bank revised downward its inflation outlook on lower commodity prices and easing supply chain disruptions.
“Inflation is expected to return to the top of the 1%-3% control range by the end of 2023 and to the 2% target by the end of 2024,” the bank said.
The Canadian dollar was trading nearly unchanged at 1.3610 to the greenback, or 73.48 U.S. cents, after earlier touching a three-week high at 1.3509.
(Additional reporting by Ismail Shakil in Ottawa and Fergal Smith in Toronto; Editing by Nick Zieminski and Jonathan Oatis)
