Interest rates go up again, but is this the beginning of the end?

The Bank of Canada (BoC) continued its policy of quantitative tightening today with a 25 basis points (bps) rate hike. This is the eighth increase in a row and brings the overnight rate to 4.5%—the highest it has been since 2007.

With this rate increase, the BoC provided some unexpected guidance signaling this may be the peak of the current cycle. The bank pointed to stronger-than-expected growth at the end of 2022, a tight labour market, and elevated short-term inflation expectations as the reasons for today's rate increase.

CIBC Economics notes the bank also pointed to an ease in the 3-month core inflation rates and expects overall inflation to come down significantly this year. This is as a result of lower energy prices, improvements in supply chains and the lagged effects of higher interest rates.

Today's rate increase was expected by markets and may indicate the end of the BoC's aggressive tightening cycle. The BoC suggested economic growth will stall in the first half of the year, and inflation is expected to lower to 3% by mid-year.

CIBC Economics is aligned with the BoC policy and expects the economy will evolve in line with (or even a little weaker) than the bank's forecast. CIBC Economics believes today's interest rate hike will likely mark the final increase for this cycle.

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