Is the Bank of Canada finally done hiking rates?

As was widely expected, the Bank of Canada delivered a second consecutive rate hold today, leaving its key benchmark rate at 5.00%.

That was welcome news for variable-rate mortgage holders, who won't see their interest costs rise this month as prime rate will remain at 7.20%.

In its statement, the Bank said it made the decision based on "clearer signs that monetary policy is moderating spending and relieving price pressures."

However, the Bank added it "remains concerned that progress towards price stability is slow and inflationary risks have increased, and is prepared to raise the policy rate further if needed."

Observers said the Bank maintained its hawkish bias given continued strong wage growth and core inflation that remains about the Bank’s comfort level.

"Although the BoC has painted a clear picture for why it doesn't need to hike again, we expect its hawkish rhetoric to persist," said TD Economics economist James Orlando. "It needs to maintain current tight financial conditions in order to achieve its forecasted slowdown."

Despite its tightening bias, economists at National Bank Financial noted some dovish elements to the Bank's statement, including its acknowledgement that past rate increases are now "dampening economic activity and relieving price pressures."

"In the battle between slower growth and stickier inflation, the former won out at this meeting as the Bank opted for the cautious/prudent approach leaving rates unchanged," the economists said. "There is clearly some optimism from the Governing Council that rate hikes are working as the economic rebalancing gives them hope more meaningful inflation relief is on the horizon."

Where do rates go from here?

Economists from the big banks are unanimous in predicting that we’ve reached peak interest rates for this cycle, believing that the Bank of Canada won’t deliver any further hikes.

Bond markets, however, still see a slight chance of an additional rate hike at the Bank’s December 6 monetary policy meeting. However, there will be plenty of economic indicators released before then that are sure to impact those odds.

"While markets are hesitant to build in another hike, the impact of the BoC's rhetoric has resulted in a higher-for-longer path for the BoC's policy rate," TD’s Orlando wrote.

As a result, most forecasts suggest the first rate cuts won’t come until at least the second half of 2024.

Updated economic forecasts

Today's rate decision was accompanied by the Bank of Canada’s latest Monetary Policy Report, in which the central bank revised both its inflation and growth forecasts.

The Bank revised its inflation projections upward. It now expects CPI inflation of:

· 3.9% in 2023 (up from 2.7% in its July forecast)

· 3% in 2024 (vs. 2.5%)

· 2.2% in 2025 (vs. 2.1%)

"Near-term inflation expectations and corporate pricing behaviour are normalizing only gradually, and wages are still growing around 4% to 5%," it noted. It said it still expects inflation to return to its 2% target in 2025, "but the near-term path is higher because of energy prices and ongoing persistence in core inflation."

At the same time, the Bank revised its GDP growth forecasts as follows:

· 1.2% growth in 2023 (vs. 1.8% previously)

· 0.9% growth in 2024 (vs. 1.2%)

· 2.5% growth in 2025 (vs. 2.4%)

"The near-term weakness in growth reflects both the broadening impact of past increases in interest rates and slower foreign demand," the Bank said. "The subsequent pickup is driven by household spending as well as stronger exports and business investment in response to improving foreign demand. Spending by governments [also] contributes materially to growth over the forecast horizon."