The Bank of Canada’s 50 basis point (bps) hike surprised the market which had priced in 75 bps, say two Canadian asset managers. Geoff Phipps, portfolio manager and trading strategist at Picton Mahoney Asset Management, says the smaller-than-expected rate hike may raise questions about the bank’s willingness to exact further pain on the Canadian economy in the face of mounting opposition to potential fallout from an aggressive path of hikes. It maintained language expressing concern about the imbalance between Canadian labour supply and demand and core inflation stickiness remains a concern, but the headline inflation rate expectation for the end of 2023 has been downgraded for the first time to below three per cent which is within the bank's target range. “Overall, this decision may appease some fearing an aggressive path of hiking pushing Canada into a deep recession. The bank remains in a difficult position, as does the FOMC (U.S. Federal Open Market Committee) in trying to engineer a tempering in inflation (and inflation expectations), particularly in light of continued fiscal impulse from both countries,” says Phipps. Thomas Reithinger, fixed income portfolio manager at the Capital Group, says the main reason behind the smaller-than-anticipated hike is due to the bank becoming more concerned about the interest-sensitive sectors of the Canadian economy, particularly housing. As well, the “50 bps hike is further a sign that the bank is beginning to worry more about economic activity and less on pure inflation numbers,” he said. “It’s likely that the bank is getting close to where it wants interest rates to remain for an extended period of time.” While the bank says it is not done with interest rate hikes, it will likely be more sensitive to weaker economic data going forward. “It is expected that future interest rates hikes will be smaller than the previous ones experienced this year,” says Reithinger.
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