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The Bank of Canada (BoC) on Wednesday is expected to keep rates on hold at a 22-year high of 5% after growth contracted in the third quarter and is seen slumping next year, analysts predicted.
The central bank hiked rates by a quarter point in both June and July and has left them on hold since, adding that it is prepared to tighten further to tame inflation that has remained above the bank's 2% target for 31 months.
Canada's economy unexpectedly contracted at an annualized rate of 1.1% in the third quarter, avoiding a recession, but most economists forecast that upcoming mortgage renewals at higher rates will take another chunk out of growth next year.
Inflation eased more than expected to 3.1% in October.
"There's little question that the Bank of Canada will keep its policy rate at 5% this week," Desjardins Group economists Royce Mendes and Tiago Figueiredo said in a note.
"Mortgage renewals will become a far greater headwind to the economy as time passes. This is likely to cause the economy to go from balanced to weak, with a brief recession expected in 2024," they said.
The decision will be announced at 10 am ET (1500 GMT). Deputy Governor Toni Gravelle will deliver a speech explaining the bank's reasoning and hold a news conference on Thursday.
The BoC projects that inflation will hover around 3.5% until mid-2024, before inching down to its 2% target in late 2025. Macklem last month said that interest rates may be at their peak, given excess demand has vanished and weak growth is expected to persist for many months.
Money markets are betting that there could be a rate cut as early as March, but Macklem has said that the BoC is not even thinking about cuts yet because inflation is still well above target.
"The Bank will continue to sing from the hawkish song sheet, still openly talking about the possibility of rate hikes, not cuts," Douglas Porter, chief economist at BMO Capital Markets, said in a note.
"A renewed rising crescendo of inflation would sound a sour note indeed for the 2024 outlook," he said.
The BoC will start cutting interest rates in the second quarter of next year as inflation and the economy slow, according to a Reuters poll published last week. (Reporting by Steve Scherer; Editing by David Ljunggren and Mark Porter)