The slowdown economists have been warning about has arrived in Canada — and with it, the likely end of the Bank of Canada’s historic campaign of rate increases.

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Growth is flat, the unemployment rate has risen, retail sales are sluggish and inflation is slowing. Those are some of the reasons why investors and economists expect governor Tiff Macklem and his governing council to keep the benchmark overnight rate unchanged at five per cent on Oct. 25.

But officials are unlikely to state that they’re done. The path of future inflation is uncertain, and consumers and businesses are still anticipating an elevated rate of inflation going forward, according to surveys. Closely watched measures of core inflation, which strip out more volatile items like gasoline, are stuck above 3.5 per cent.

Macklem won’t want to do anything that constrains the bank’s ability to raise borrowing costs again, if necessary.

“Monetary policy is likely sufficiently restrictive,” Carrie Freestone, an economist at Royal Bank of Canada, said. “But I don’t think the Bank of Canada will explicitly say that they are finished hiking because they want to leave the option on the table if they need to go ahead with a hike later on.”

Macklem’s task is to sketch out the path and timeline by which inflation, which was 3.8 per cent in September, will revert to the two per cent target. The bank will give updated forecasts Wednesday in an accompanying monetary policy report, where officials are likely to talk about headwinds for consumers, who are curbing their spending in response to the highest borrowing costs in decades.

“Watching from the sidelines is warranted,” Charles St. Arnaud, chief economist at Alberta Central, said by email. His research suggests economic downturns in Canada tend to start five to seven quarters after interest rates reach a level that restrict growth, which Arnaud says happened in the fourth quarter of 2022.

His estimates line up with consensus forecasts for very slow growth. Gross domestic product is expected to expand by 0.2 per cent annualized on average over the next three quarters, according to a Bloomberg survey of economists. That would follow a surprise contraction in the three months between April and June.

In other words, if the forecasts are right, there would be a full year of stalled growth.

Despite the rising likelihood of recession, Macklem and the other five members of the rate-setting council are also likely to reiterate that easier monetary policy is still a long way off.

Traders in overnight swaps seem to agree. Markets aren’t pricing in high odds of either a rate increase or a rate cut between now and next summer. Economists are more skeptical: they expect cuts to start in the second quarter of next year, according to the median forecast in a Bloomberg survey.

The startling jump in long-term bond yields is a factor, as it’s contributing to tighter financial conditions. When the Bank of Canada last raised rates in July, the Canada 10-year yield was around 3.5 per cent. Now it’s over four per cent. Mortgage rates are marching higher. Earlier this month, Macklem said that while higher yields aren’t a substitute for tighter monetary policy, they’re something the governing council “would take into account.”

Canada’s households are more indebted, on average, than their United States counterparts and their shorter-duration mortgages roll over faster. That makes the Canadian economy more sensitive to higher rates and it’s one reason the Bank of Canada first declared a pause in January, well before the United States Federal Reserve.

Canada’s labour market is adding jobs and the unemployment rate has held at 5.5 per cent for the past three months (up from five per cent at the start of the year). Yet labour demand is slowing, the bank’s business outlook survey shows, and job vacancies are less common.

Still, Macklem’s mandate is to deliver two per cent inflation. In its July forecasts, the bank said it doesn’t expect to achieve that level until mid-2025. That’s a reason to keep alive the threat of tighter policy, even in the face of a weaker economy.

“If they ultimately wind up allowing inflation expectations to come unanchored because they under-tightened, I think that makes their job quite a bit more difficult in the future,” Andrew Kelvin, chief Canada strategist at Toronto-Dominion Bank’s securities unit, said by phone. “It ultimately produces worse economic outcomes.”

Bloomberg.com