Will the inflation rate inflame the Bank of Canada's hikes?

Despite a slight decline, Canadian inflation remained at a “disappointingly high” level of 6.8% in November – giving the Bank of Canada yet another reason to implement further rate hikes in 2023, according to economist Sherry Cooper.

“Before [the latest inflation] report, traders were pricing in a pause at the next policy decision, with a possibility of a 25-basis-point hike,” Cooper said. “Barring an excellent inflation report for December, another rate hike is likely on January 25, likely a 25bp hike.”

The central bank’s previous assurances of less frequent, more measured “data-driven” hikes notwithstanding, the inflation trend means that “at least two or three more hikes” are well within the realm of possibility, “with no rate cuts likely next year,” Cooper said.

“Wage inflation is running at 5.6% y/y, and wage negotiations are getting more aggressive,” she warned.

Will the BoC adjust its strategy for elevated inflation?

Central bank governor Tiff Macklem reiterated that the BoC will stay its course when it comes to the high-interest strategy, as it will help establish the environment that could cool down demand, allowing supply to finally catch up.

“It will take time for higher interest rates to bring inflation back to target, but the good news is that they are starting to work,” Macklem said. “We know the adjustment is difficult. But it will be worth it.”

Macklem added that the BoC is walking a fine line between over- and under-tightening monetary policy.

“If we raise rates too much, we could drive the economy into an unnecessarily painful recession and undershoot the inflation target,” he said. “If we don’t raise them enough, inflation will remain elevated, and households and business will come to expect persistently high inflation.”