‘Rate hikes are likely behind us’: analyst says as Bank of Canada holds interest rate steady

There’s no question it has been difficult for many Canadians to deal with aggressive interest rate hikes over the past year and a half, but it seems more likely there is light at the end of the tunnel.

The Bank of Canada once again held its key interest rate steady at 5 per cent Wednesday morning, suggesting its monetary policy is succeeding in slowing down the annual rate of inflation — just not as fast as anticipated.

“When you read through the statement, it comes across as both ‘dovish’ and ‘hawkish’, meaning the Bank of Canada has implied they are done with rate increases, but they might not be done with rate increases. It was a rather confusing statement in that regard,” said Phillip Petursson, chief investment strategist at IG Wealth Management.

“They acknowledged the weaker consumer and the weakness we’ve seen in the Canadian economy, but also then said inflation is not slowing as fast as it would like.”

But Petursson suggests any implied threat of further rate hikes may just be “sabre rattling” by the central bank, which continues to try to “talk down inflation” rather than rely on further increases in its policy rate, which have weighed heavily on consumers.

“We believe Canadians can take comfort in the fact that we have probably seen the end of any interest rate increases for this cycle,” Petersson told CityNews.

“It doesn’t mean that the Bank of Canada will be cutting rates anytime soon — that’s probably deeper into 2024 — but the rate hikes are likely behind us.”

The goal of the Bank of Canada’s quantitative tightening has been to bring the annual rate of inflation down to two per cent after it spiked to a decades-high 6.8 per cent in 2022.

To that end, the central bank began a series of interest rate hikes in March 2022, pushing its key rate from a historically low 0.25 per cent to the current rate of 5 per cent in an effort to slow the economy.

“When we model it out, what we see for the remainder of this year and early into 2024, is inflation is likely to stay sticky around 3.5 per cent,” Petursson explained, echoing the sentiment from the Bank of Canada.

“We can see signs of weakening inflation, for example, last month inflation was down 0.1 per cent on a month-over-month basis. We see a gradual decline in inflation to the Bank of Canada’s target. It could be as early as a year from now, but more likely the bank is correct that it is going to be in 2025.”

From a consumer’s perspective, Petursson says it is easy to see the stress of higher interest rates on household finances and predicts spending habits will keep shifting to deal with the cost of living well into 2024.

“It’s really showing up now in that retail sales are down … Canadians aren’t spending nearly as much as they were a year ago on stuff, or even keeping up with inflation, so that suggests the interest rates are having a significant impact on consumption habits.’

But the silver lining, Petursson suggests, is that with interest rate hikes likely done for now, Canadians can start to look forward to possible cuts in the year ahead.

“Not immediately — because the bar to cut is a lot higher than the bar to raise — but for the time being, we shouldn’t worry about runaway inflation nor runaway interest rates.”

–With files from Hana Mae Nassar