(Kitco News) The Bank of Canada surprised the markets with a slower tightening pace, as it raised rates by 50 basis points instead of the estimated 75-basis-point increase. This brought its key interest rate to 3.75%.
Canada's central bank said that the effects of its aggressive monetary policy tightening "are becoming evident in interest-sensitive areas of the economy," such as housing and household and business spending.
The slowdown in international demand is also starting to weigh on exports, and economic growth is "expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy," the central bank said Wednesday.
The Bank of Canada now projects GDP growth to slow from 3.25% this year to under 1% next year and 2% in 2024.
Inflation is also projected to ease as interest rate increases work their way through the Canadian economy. Annual inflation is estimated to move down to 3% by the end of next year and return to the Bank's 2% target by the end of 2024.
However, the smaller-than-expected rate hike in October does not mean that the tightening cycle is over. The Bank of Canada noted that its policy interest rate will need to rise further, given the still elevated price pressures and inflation expectations.
"Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding," the central bank said. "Quantitative tightening is complementing increases in the policy rate."
Following the announcement, gold priced in Canadian dollars popped higher, last trading near its new daily highs at $2,273.87, up more than 1% on the day.
The Bank of Canada's less aggressive approach reveals a hint that the Canadian economy might be losing momentum quicker than expected, said CIBC senior economist Andrew Grantham.
"Housing is seen to have retreated 'sharply,' but there was also reference to consumer and business spending softening, as well as weaker international demand," Grantham said Wednesday.
Yet the slight shift in the pace does not mean a change in how high the Bank of Canada is willing to go, Grantham pointed out.
"The Bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and …. rates "will need to rise further." As such, this may just represent a slightly slower path to the same peak interest rate (4.25%) that we had forecast prior to today's smaller than anticipated 50bp hike," he said.
Prior to this meeting, the central bank had already raised rates by 300 basis points this year, including a full percentage point increase in July.
The Bank of Canada's decision comes just a week before the Federal Reserve is expected to raise rates by another 75 basis points at its November meeting.
