Canada's central bank predicts that inflation will decline in a sustainable manner, so there is no need to raise interest rates again.

The Canadian central bank (BoC) raised interest rates again by 25 basis points to a level of 4.5 percent. However, they also stated that it was time to stop the rate hike cycle. Traders reacted negatively to the announcement, causing the Canadian dollar to be bullied in financial markets.

Following the BoC announcement, USD/CAD rose 0.4 percent to a high of 1.3428 before falling to around 1.3415 as this news was written in the middle of the New York session on January 25. Aside from that, many parties prefer to wait until the Fed's FOMC meeting next week before making any major decisions.

USDCAD Daily

The BoC said that the follow-up rate hike of 25 basis points was reasonable amid stronger-than-expected growth and the current tight labor market conditions. However, "there is growing evidence that restrictive monetary policy is slowing economic activity, particularly household spending," they added. The BoC also anticipates a slowdown in business investment in line with the widening impact of rising interest rates.

 

The BoC predicts Canadian economic growth will stall in mid-2023, then pick up slightly towards the end of the year. Projected Canadian inflation is expected to decline "significantly" in the coming months, then fall back to the 2 percent target in 2024.

In line with that, the BoC believes it is time to end the rate hike cycle. Their next task is to monitor the impact of the policy on the economy.

"If broad economic development progresses in line with the MPR (BoC) outlook, the Board of Governors expects to maintain policy interest rates at the current level while evaluating the impact of the cumulative interest rate hike," the BoC said in a statement.

The BoC action was beyond the expectations of many parties. The BoC announcement also made the market increasingly wary of the outcome of several other major central bank meetings to be held next week. In particular, the US Federal Reserve

"The BoC has pivoted! will be keeping rates on hold until they figure out what to do next. signals that the economy is slowing and a quicker rate hike is taking effect. Sounds familiar? The Fed and others may follow. The market does not expect the BoC to announce in such a blatant manner, according to Viraj Patel, an expert at Vanda Research.