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Expectations Shift: Canadian Interest Rates Projected to Hold at 5% Through 2023

Market participants in Canada anticipate a hold on Bank of Canada's (BoC) interest rate hikes through 2023, with rate cuts to follow, reveals a recent central bank survey.

Bank of Canada
Bank of Canada

BoC Rate Hikes: A Pause in 2023

A recent survey by the BoC indicates that there will be no additional rate hikes in the foreseeable future. The central bank's second-quarter survey conducted from June 8 to 19, found that the median participant expects rates to remain at a 22-year high of 5.00% until the end of 2023. Contrary to previous assumptions, rate cuts are predicted to commence only in March 2024.

From Rate Cuts to Hikes: A Shift in Expectations

This new data is a pivot from the previous survey released in April, where the median expectation was a rate cut in January when the BoC's key policy rate was at 4.50%. Despite the revised outlook, the potential for another rate hike this year is still being speculated upon by money markets.

GDP Growth Projections: Optimism on the Horizon

The forecast for Canada's economic performance has also seen a shift, with a median of 25 survey participants now predicting a 0.7% gross domestic product (GDP) growth by the end of 2023. This replaces the earlier forecast of a 0.1% contraction. The adjustment aligns with the BoC's recent statement on excessive demand in the economy prompting a boost in GDP predictions.

Inflation: The Balancing Act Continues

While the central bank has increased rates 10 times since March 2022 to curb inflation risks, the bank warns further hikes may be necessary. The survey released on Monday estimates an annual inflation rate of 3.0% by year-end, slightly higher than the previous 2.7%. However, the forecast for a reduction to 2.2% by end-2024 remains consistent. The BoC also anticipates inflation hovering around 3% over the next year, reaching its target of 2% by mid-2025—six months later than previously expected.