Bank of Canada sounds more cautious about its willingness to higher interest rates – CIBC

On Wednesday, the Bank of Canada (BoC) raised its key interest rate by 50 bases points to 4.25%,  in line with market consensus. Analysts at CIBC, point out the BoC sounded more cautious. They see the central bank plateauing at the 4.25% level. 

Key Quotes: 

“The Bank of Canada flashed a yellow card on its rate hiking team by sounding more cautious about its willingness to press on to even higher interest rates in 2023, even as it tightened today. As we expected, the Bank lifted the overnight rate by 50 basis points to 4.25%, but having previously concluded these messages by saying that rates “will need to rise further,” it now says only that it will “be considering whether the policy interest rate needs to rise further”.

“We see the overnight rate plateauing at this 4.25% level, but unlike what financial markets have been presuming in the last couple of weeks as bond yields tumbled, we expect the Bank of Canada to keep the overnight rate there through 2023, and ease only gradually in 2024.”

“We expect to see enough further evidence that demand growth is slowing to keep the Bank on hold in Q1, but even then, the Bank might want to leave the door ajar for a later hike by retaining the wording it used today. Indeed, it might not be until the spring of 2023, when we've put a couple of quarters of negligible growth behind us and have clearer signs of economic slack, when the language of these statements changes to indicate that the Bank is no longer "considering" further hikes.”

“We see the Fed pressing on to higher rates than the Bank of Canada, so a strengthening in the loonie awaits a general turn to a weaker US dollar globally, something we expect to see as we get to the end of the Fed's hiking cycle in Q1 2023.”