The head of the Bank of Canada made it clear that the mission to bring soaring inflation to heel is unfinished. Shortly after the central bank moved on a smaller-than-expected 50-basis-point interest rate increase, Tiff Macklem, the governor, declared that it is not yet the time to pivot from an emphasis on slowing growth, even though the central bank’s own forecast shows Canada is teetering on the cusp of a recession.

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'We're not there yet': Macklem signals more rate hikes as economists make bets on how high they'll go Back to video

“This tightening phase will come to a close,” Macklem told reporters on Oct. 26. “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 and we will determine the pace based on developments going forward and I think we’ve been pretty clear on the key things we’re looking at.”

Economic data, most notably headline inflation readings that most recently clocked in at an annualized pace of 6.9 per cent, will inform the Bank of Canada’s path of rate hikes. The monetary policy report accompanying the decision signalled that higher interest rates would be necessary to slow the pace of price increases, as the outlook suggests inflation will still be above the central bank’s target at the end of next year.

However, Macklem avoided establishing a ceiling or hinting at when rate increases would end. “There are no easy outs to restoring price stability,” he said at the press conference.

The central bank has now boosted the policy rate by three and a half percentage points since March, bringing the benchmark rate from near zero to 3.75 per cent.

There are no easy outs to restoring price stability

Tiff Macklem, governor, Bank of Canada

Leading up to the October policy decision, markets had largely priced in a 75-basis-point hike, and most economists had that figure in their preview notes. While some economists took the central bank’s smaller increase as a dovish move, most economists are putting the “terminal rate,” or the end point of interest-rate increases, in a range of four per cent to 4.25 per cent.

It would no longer take much to nudge rates within that range.

“We continue to expect another 50-basis point hike in December with a pause in January at 4.25 per cent, although with risks still tilted towards higher policy rates,” wrote Veronica Clark, an economist at Citigroup Global Markets Inc., said in a note to clients.

Clark wasn’t alone in sticking with her call.

“Even with the weaker growth profile, the bank stated that its preferred measures of inflation are not yet showing meaningful evidence of easing, and as such the statement still suggested that interest rates ‘will need to rise further,’” wrote, Andrew Grantham, senior economist at CIBC Capital Markets. “As such, this may just represent a slightly slower path to the same peak interest rate (4.25 per cent) that we had forecast prior to today’s smaller than anticipated 50-basis-point hike.”

Josh Nye, senior economist on the Royal Bank of Canada’s economics team, held a similar view as he expected the rate to move higher still towards a peak of four per cent, even as he called the October decision a “dovish pivot.”

RBC Dominion Securities Inc., the investment banking arm of Royal Bank, extended the range, saying the terminal rate could go as high as 4.5 per cent. Still, economist Simon Deeley told his clients that his own call was for an end point of four per cent.

How do they stop raising rates when inflation is still so far away from their target?

Jean-François Perrault, chief economist, Bank of Nova Scotia

With a consistent stream of outsized rate hikes mostly ranging from 50 basis points to a full percentage point this year, it’s easy to forget that a half per cent hike is still a hawkish move in a historical sense with the norm being to move in quarter-point increments. Many market voices anticipate Canada will see something of a return to that norm in December as they broadly estimate a meeker 25-basis-point hike to close out the year, though they haven’t outright shut the door on a possible 50-basis-point hike.

Canada’s sensitivity to higher interest rates could put the central bank in a tough spot if the plan was to go bigger than a quarter-point hike. The monetary policy report already flashed warning signs of an economic slowdown as the new quarterly outlook revealed that the gross domestic product increased 1.5 per cent in the third quarter, falling from a previous estimate of two per cent. It further predicted the path of growth will slow to an annualized rate of 0.5 per cent over in the last quarter of 2022.

It’s for this reason and Canada’s high household indebtedness that Royce Mendes, managing director and head of macro strategy at Desjardins Group, said Canada’s central bank would need to pivot on the path of rate hikes before the U.S. Federal Reserve.

“As we’ve long said, the Canadian central bank needed to pivot before its U.S. counterpart as a result of the interest-rate sensitivity of the Canadian economy,” Mendes said in an Oct. 26 note. “While the statement leaves open the door to the possibility of another 50-basis-point move in December, expected economic underperformance will likely limit the next hike to only 25 basis points.”

In the search for a rate hike ceiling, Bank of Nova Scotia chief economist Jean-François Perrault said one of the biggest challenges facing the central bank will be managing inflation expectations among Canadians.

“People don’t necessarily believe inflation is coming down very quickly,” Perrault told Financial Post’s Larysa Harapyn in an Oct. 26 interview. “So, how is it possible for the central bank to stop raising rates at 4.25 per cent when inflation is still above six per cent? What kind of a leap of faith is that going to require for Canadians to say… the bank has done enough?”

“That, I think is the bigger challenge that they’ve got,” he added. “How do they slow down, how do they stop raising rates when inflation is still so far away from their target?”

• Email: shughes@postmedia.com | Twitter: StephHughes95