The Policy Rate rose by one-half of a percentage point (or 50 basis-points) to 3.75%.  The majority of market watchers had predicted a 75 basis-point bump.  The smaller than expected increase appears to be an indication the BoC is nearing the end of this rate-hiking cycle. But it is not done yet.

“This tightening phase will come to a close.  We’re getting closer to that point, but we’re not there yet.  So we do expect interest rates will need to go up further,” said Bank of Canada Governor Tiff Macklem following last week’s rate announcement.

Macklem also indicated future increases would likely be smaller than what we have seen so far this cycle.  That leaves the door open for another increase at the next, and final, setting for the year, in December.  Several forecasts predict the Bank will pause at 4%.

The Bank believes its plan for fast, sharp increases in interest rates is working, and it is acutely aware that there is a risk of over-tightening and pushing the economy into a serious recession.

While a pause to measure the effects of its work would seem prudent, the Bank also has to take international factors into account.  Key among those is the U.S. economy.

Inflation pressures in the U.S. remain higher than they are here and the U.S. central bank is expected to deliver another 75 bps increase to its policy rate this week, putting it above the Canadian rate.  That would likely further devalue the Loonie against the U.S. dollar, which has implications for Canada’s broader economy.