Bank of Canada set for fifth outsized rate hike

The Bank of Canada is set to deliver a fifth — but possibly final — outsized interest-rate hike this week amid signs its inflation-fighting efforts may be dragging the country’s economy into a recession.

Markets are pricing in a 75 basis-point increase in the central bank’s rate at its decision in Ottawa. That would bring the benchmark to 4%, a level not seen since March 2008.

The central bank, led by Governor Tiff Macklem, has been signalling its intent to continue tightening policy until it sees “clear evidence” inflation has started returning to its 2% target from about 7% currently.

But there are limits to how far borrowing costs can go due to Canada’s high level of household indebtedness. Investors will be watching for any hints from Macklem that the end of his hiking cycle is near.

Policymakers are increasingly worried about growing financial stability risks associated with higher interest rates. There’s also speculation Federal Reserve Chairman Jerome Powell will start planning for a reduction in the size of increases after an expected three-quarter point hike next week.

Three weeks ago, Australia’s central bank surprised markets when it delivered a quarter-point increase, ending a string of half-point moves and becoming the first major central bank to break ranks.

Markets are anticipating the Bank of Canada will follow Wednesday’s outsized hike with two smaller 25-basis-point increases in coming months, before stopping altogether.

The bank moved in half-point increments in April and June, hiked by a full percentage point in July and 75 basis points in September.

—Bloomberg