Further rate hikes are on the horizon in Canada

Further interest rate hikes appear to be on the horizon.

At least, this was the message conveyed by the Bank of Canada Governor, Tiff Macklem. Speaking to a group of businessmen in Halifax, Nova Scotia, he noted that there were little signs that underlying inflation was easing.

The overall tone of the speech was very hawkish and left little doubt that we can expect further interest rate hikes over the next few months. In August, headline inflation was 7%, while core inflation was around 5%. The central bank’s target of 2% inflation is still some way to go.

Further interest rates would be over and above the 300 basis points, which we have already seen this year and could take the interest rate over 4%. But Governor Macklem said that further interest rate hikes should be expected.

“When combined with still-elevated near-term inflation expectations, the clear implication is that further interest rate increases are warranted,” he said. “Simply put, there is more to be done.”

Macklem added that the Canadian labor market was still tight, with an excess of demand and not enough supply. Meanwhile, global inflation pressures, such as high global shipping rates and supply chain concerns, have continued to subside. With its next policy meeting scheduled for October 26, a 50-basis point hike is expected.

However, this is not likely to be the last, as Governor stated explicitly that inflation “will not fade away by itself.” Economics said the tone and intent seemed clear, and the hawkish stance is unlikely to change in the short term. "Don't expect the Bank of Canada to shy away from outsized interest rate increases any time soon," said Royce Mendes, head of macro strategy at Desjardins Group.

Governor Macklem added that it was a delicate balancing act between cooling inflation while trying not to trigger a recession. "There is a path to a soft landing, but it is a narrow path, and there are risks," he said. Meanwhile, Scotiabank economist Derek Holt said the speech squashed any hopes that the rate hike expected this month would be the last one.

“There had been a narrative offered in the market that October’s hike would be one more and done with a coming dovish pivot. That narrative got flushed today. With less than three weeks to go before the next decision on October 26, the Governor is clearly not thinking that the October communications will involve a dovish pivot versus a largely preset path to keep hiking thereafter,” he added.