Bank of Canada likely to raise rates again Wednesday — but should it?

The Bank of Canada is widely expected to raise its trend-setting interest rate this week by a quarter of a percentage point, which would bring it to 4.5 per cent.

If it happens, it'll be the eighth time in a row that the bank has opted to hike its benchmark rate, which makes borrowing money more expensive for consumers and businesses.

But for the first time in almost a year, there isn't a solid consensus among those who watch the central bank that another hike is in the cards — or even whether one should be.

The bank is locked in a battle to wrestle inflation into submission, and it believes rate hikes are the best weapon at its disposal to win that war.

It's a war that's racked up a lot of collateral damage, including in the housing market, where average prices are down by 20 per cent since February. Other forms of consumer debt, such as credit cards, is also rising to record levels as Canadians struggle to adjust to higher prices for just about everything.

Even so, the rate hikes have so far only succeeded in bringing inflation down from a 40-year high above eight per cent last summer to 6.3 per cent last month.

That's still twice as high as the upper limit of the range the bank likes to see, which is why a majority of economists think another hike is in the offing. But Pablo Villanueva, an economist with Swiss Bank UBS is among those who thinks the best thing the Bank of Canada could do might just be nothing at all.

"The data since December has shown an economy that is weakening," he said, noting that Canada's GDP likely only grew by about one per cent in the fourth quarter of 2022. That's well down from the three per cent average for the rest of the year. Wage gains and the employment numbers paint a similar picture.

A pair of the bank's own reports from earlier this month are also singing from the same songbook, with a majority of consumers and businesses telling the central bank they now expect the economy to go into recession this year.

Villaneuva says the recent data points on Canada's GDP and the recent surge of layoffs add up to make a pretty compelling case to stand on the sidelines for a while.

"We think that this weaker outlook for the economy and inflation should give the Bank of Canada confidence that it can hold off on further hikes at least in the near term," he said.

A major reason to stand pat is that it typically takes between six months to a year and a half for the full impact of rate hikes to be felt anyway.

"We recognize that we have raised interest rates rapidly and that their effects are working their way through the economy," Sharon Kozicki, deputy governor of the Bank of Canada, told a Montreal business audience last month.

"In other words, we are moving from how much to raise interest rates to whether to raise interest rates," she said.

Karyne Charbonneau, an economist with CIBC, thinks the bank is likely to raise again on Wednesday, but she's among those who thinks there probably isn't another hike coming after that.

"If central banks are wise enough to recognize the lagged impacts of what they've already done, they won't have that many more rate hikes to deliver," she said.

The case for standing pat

While the headline inflation number continues to go up at an eye-watering pace, beneath the surface it's not hard to find goods and services that are actually cheaper now than they used to be.  

Almost two dozen of the 300-odd subcategories that Statistics Canada tracks are now in negative territory for the year, including books, computer and digital equipment, children's clothes and shoes.

Slightly cheaper medicine and parking fees may be cold comfort to anyone who tried to fill up a gas tank lately — or a grocery cart. But as demand wanes for goods and services, more and more items will move into that negative range, dragging the overall inflation rate down with them.

So if the bank is looking for excuses to take a pause, it's not hard to find them.

Stephen Gordon, a professor of economics at l'Université Laval in Ste-Foy, Que., has been tracking the shorter term inflation trends for more than a year now online. He notes that the annualized inflation rate over the past three months is now down to below four per cent. A year ago, it was more than three times that.

Investors, too, seem less confident than they've been all year that the bank is poised to hike again. Trading in investments known as swaps on Monday imply the market thinks there's about a three-in-four chance of a hike on Wednesday — but that means there's a one-in-four chance that there won't be one.

That's the first time that figure has been anything less than a sure thing since the bank started hiking last February, and a sign that investors are betting real dollars that winds of monetary policy could be blowing in a different direction soon.

Regardless of what happens this week Gordon says the real test for inflation will be in the February numbers, since that will be one year since Russia invaded Ukraine, which kicked already-underway inflation into high gear.

"I can see a case for giving a pause," he said in an interview with CBC News on Monday. "But we're still in wait and see mode about the data."