The Bank of Canada has today decided to raise interest rates significantly and at the same time has indicated that it is possible to slow down or stop this drastic step.
Policymakers led by Gov. Tiff Macklem raised the benchmark overnight lending rate by 50 basis points to 4.25% on Wednesday, the highest since early 2008. The move was in line with the expectations of a narrow majority of economists in a Bloomberg survey.
"The Governing Council will consider whether the policy rate should continue to increase to bring supply and demand back into balance and return inflation to target," the bank reported in a statement.
The move suggests a larger increase in borrowing costs may be over, and policymakers are open to a break in their aggressive cycle as they consider the need for a more refined adjustment.
High consumer prices remain a key focus for the bank, which reiterated its "firm" commitment to lower the annual inflation rate to its 2% target. "Inflation is still too high and short-term inflation expectations remain high," policymakers said.
However, the central bank pointed to growing evidence that tighter monetary policy had "constrained domestic demand," citing moderate consumption data in the third quarter and subdued housing market activity.
In the previous decision, the bank included a hawkish line indicating policymakers expect the benchmark rate to rise further.
Although gross domestic product was stronger than expected in the third quarter, the economy is still operating in excess demand. Commodity exports are robust and the labor market is tight, but the latest data supports the bank's view that "growth will essentially stall until the end of this year and the first half of this year."
Although the bank again flagged the risk that high inflation expectations remain entrenched, they said a three-month measure of underlying prices had declined, an early sign that pressures may be easing.
Markets are expected to focus on Deputy Governor Sharon Kozicki's statement for further indications.
The US dollar weakened against the Canadian currency trading at 1.3609, a decrease of 0.30%.
