Opting for Rate Increases Which Slightly Exceed Expectations May Be a Prudent Approach.


The Bank of Canada recently implemented rate hikes in July, and the institution is hinting at further increases in 2023. 

As observed in numerous media reports, a 25-basis-point uptick is on the horizon for September, potentially nudging the overnight rate to 5.25%.

This decision arises from a strong and unforeseen statement, which has set the scene for forthcoming adjustments. The target of achieving a 2% inflation rate by mid-2025 implies an extended timeline.

This underscores the potential for additional rate hikes in September, which could influence rate reduction plans. The Bank’s method involves thorough evaluation of economic indicators, focusing on the positives over the negatives.

This strategy acknowledges both economic resilience and potential deceleration, particularly in the housing market due to increased rates. The inclination leans towards a deliberate “overshoot” rather than an “undershoot.”

Managing an overshoot can be achieved through timely rate reductions, whereas addressing an undershoot, especially concerning inflation control, is a complex task. This underscores the Bank’s delicate balancing act in economic navigation.

From our vantage point, an approach involving a final push to elevate interest rates, and subsequently faster restoration to lower rates (around 4-5%), could prove more beneficial, compared to maintaining rates at a relatively elevated level, and prolonging their duration. Considering impending mortgage reviews, having a lower rate when the time comes to renew would be of great benefit to property owners, and most particularly to the segment of the population that would have a hard time adapting to high rates.

Meanwhile, the market appears to be adaptable to higher rates in the short term while sustaining a reasonably stable level of activity.

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