Contemplating another rate hike on Wednesday by the Bank of Canada – Is it appropriate?
The Bank of Canada chose not to raise its benchmark interest rate on January 25, 2023, as recent economic data indicated a weakening economy and a slowing inflation rate. This decision reflects the bank's cautious approach, aiming to closely monitor economic data, avoid premature tightening, and respond flexibly to slowing inflation and weaker economic growth signals.
Over the past year, the bank has raised its interest rate eight times in a row, making borrowing money more expensive for customers and businesses. However, despite these hikes, inflation has only been brought down from a 40-year high above 8 percent last summer to 6.3 percent last month.
Stephen Gordon, a professor of business economics, notes that the annualized inflation rate over the past three months is now down to below 4 percent. A year ago, it was over three times that. This slight decrease in inflation, combined with a weakening economy, has led the bank to pause its interest rate hikes.
The housing market has seen average prices drop by 20 percent since February, further indicative of the economic slowdown. Slightly cheaper medicine and parking charges may offer some relief to consumers, but as demand wanes for products and services, increasingly more products will move into a negative range, dragging the overall inflation price down with them.
Despite the bank's decision not to raise rates, there is still a three-in-four chance that a hike will occur on Wednesday, according to investors. However, there's a one-in-four chance that the bank may choose to hold steady again. Karyne Charbonneau, a financial expert with CIBC, assumes the bank is likely to raise interest rates again on Wednesday, but she believes there may not be another hike coming after that.
Looking ahead, the real test for inflation will be in the February numbers because that will be one year since Russia invaded Ukraine, which kicked already-underway inflation into high gear. The Bank of Canada may decide to take a pause in its interest rate hikes based on the current inflation trends and market indicators.
Pablo Villanueva, an economic expert with Swiss Bank UBS, believes that the Bank of Canada may do nothing at all. He notes that the headline inflation number remains to rise at an eye-watering rate, but underneath the surface, it's not hard to find products and services that are in fact more affordable currently than they used to be. Almost 200 out of the 300-odd subcategories that Statistics Canada tracks are now in a negative area for the year, including publications, computer and electronic equipment, children's clothing, and shoes.
Throughout 2025, the Bank of Canada maintained a cautious stance on interest rates amid mixed economic signals: inflation rates showed some easing but core inflation measures remained somewhat sticky, and the economy was weakening but demonstrating resilience. Analysts noted the Bank kept its options open, with decisions contingent on future economic developments including inflation trends and trade policies.
In summary, the Bank of Canada's decision not to raise rates on January 25, 2023, aligns with its approach to closely monitor economic data, avoid premature tightening, and respond flexibly to slowing inflation and weaker economic growth signals at that time.
Businesses and the overall economy may find some temporary relief as the Bank of Canada chooses not to increase its interest rate on January 25, 2023. However, financial analysts predict a possibility of further rate hikes in the near future, potentially impacting the cost of borrowing for both consumers and businesses.
