Bank of Canada Interest Rate Setting Lower Thank Expected - Is That a Good Thing?

The Bank of Canada (BoC) is full of surprises. At today's interest rate announcement, it increased the benchmark rate by 50 basis points, to 3.75%. This is less than the 75 basis points hike that had been expected, and is an indication that the BoC feels less need of strong intervention on its part to slow inflation growth. Although much of the announcement continued to be hawkish, there was a dovish note - the announcement said "The effects of recent policy rate increases ... are becoming evident in interest-sensitive areas of the economy," and went on to site house prices and both household and business spending. At the same time, the announcement said that "Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched." The Bank also cut its GDP growth expectation for Canada in 2023 in half, to just under 1%, suggesting that we may slide into recession in early 2023.

Is this slower pace of rate increases a good thing? We feel the answer is "no" - the BoC signalled that further increases are coming, so borrowers will feel the pinch, and their reason for slowing the pace - a stalling in GDP for the balance of the year and into early 2023 - does not bode well for the economy. While it has not come right out and said that we may be headed for recession, the Bank's low growth projection for 2023 and its comment on "flat" economic activity in the next 2-3 quarters, points to tough economic times ahead. You can read the announcement here.