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Bank of Canada raises rates and hints at pause in tightening cycle

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Canada’s central bank raised interest rates to their highest since 2008 and laid the groundwork for a potential pause in its monetary policy tightening campaign after policymakers acknowledged recent increases had helped cool domestic demand.

The Bank of Canada on Wednesday lifted its overnight rate 0.50 percentage points to 4.25 per cent, marking the seventh meeting in a row at which it has raised benchmark borrowing costs. A slight majority of economists expected the central bank to match the size of its most recent rate rise in October, although financial markets bet on a 0.25 percentage point increase.

In a statement accompanying its decision, the BoC said “it will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance”, a pivot from previous statements this year that have asserted the need for more increases. This follows remarks from governor Tiff Macklem at the BoC’s October rate announcement that the bank was near the end of its tightening cycle.

Canada is the first G10 economy to hint that it is ready to pause its tightening cycle, as its peers continue to fight persistent inflation. The BoC scaled back the size of its rate increase in October to 0.5 percentage points after “front-loading” its rate rises with a large 1 percentage point increase in July.

South of the border, economists expect the US Federal Reserve to slow the pace of its policy tightening next week and enact a half-point raise after four consecutive 0.75 percentage point rate rises. Fed chair Jay Powell has said, though, that the US central bank still has a long way to go in its fight against inflation.

Earlier on Wednesday, India’s central bank raised interest rates, saying inflation was still too high, while the previous day the Reserve Bank of Australia raised borrowing costs and signalled further increases were on the horizon.

The BoC said Wednesday there is “growing evidence” that monetary policy is starting to cool domestic demand in Canada, despite a tight labour market with historically low unemployment, and third-quarter GDP data that blew past economists’ expectations.

Household spending has continued to soften, and home prices fell for the eighth consecutive month in November as sales volumes dropped sharply.

“Three-month rates of change in core inflation have come down, an early indicator that price pressures may be losing momentum,” the BoC said.

“Overall, the [data] support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year.”

The national inflation rate was 6.9 per cent in October, according to the most recent data, down from a historic high of 8.1 per cent in June. The BoC expects to reach its 2 per cent inflation target by the end of 2024.

Macklem said in October that the BoC was trying to find a balance between not tightening enough and allowing inflation to become entrenched, or tightening too much, which could adversely effect the labour market and make it challenging for Canadians to pay off debts.

Wednesday’s decision comes as the BoC has faced harsh criticism from the political left and right. Pierre Poilievre, leader of Canada’s Conservative party, has been attacking the institution for months, accusing it of “money printing” during the pandemic, and has said he would fire Macklem if elected prime minister.

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