3 reasons the Bank of Canada may be set to pause interest rate hikes

Canadians struggling with debt payments hoping for break in interest rate increases

It's been almost exactly one year since the Bank of Canada began aggressively raising its key overnight lending rate. Since then, Canadian households have struggled with ever-increasing debt payments. Borrowing costs are up a stunning 425 basis points in the last 12 months.

But the days of relentless rate hikes may be about to draw to a close. On Wednesday, the Bank of Canada unveils its latest interest rate policy. Many expect it to make good on a promise to hit the pause button.

"The bank will almost certainly hold the key overnight rate at 4.50 per cent on March 8," said James Laird, CEO of Ratehub.ca and president of mortgage lender CanWise Financial.

In January, the central bank raised its key interest rate to 4.5 per cent, but it also indicated it was ready to end its year-long series of rate hikes.

"If economic developments evolve broadly in line with the MPR [Monetary Policy Report] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases," the Bank of Canada wrote in its official statement.

That's a pretty significant caveat.

Since the bank's last decision on Jan. 25, we have seen job numbers, GDP data, home sales statistics and, of course, inflation numbers.

Inflation is way down from last summer's peak

The consumer price index spent most of the last several decades lumbering along between one and two per cent. As the effects of the COVID-19 pandemic began to take hold, inflation began to climb.

At first it was dismissed by many as merely "transitory." But prices never got the memo and just kept climbing. The year-over-year rate eventually peaked at 8.1 per cent last June.

By then, central banks everywhere were aggressively boosting interest rates. Global supply chain issues were coming under control, and the worldwide price of oil had begun to come down off the heights it reached after Russia invaded Ukraine one year ago.

By last week, the CPI had decelerated to 5.9 per cent annualized. The shorter trends were slowing even more.

Food prices are still way too high, but the overall trend was seen as a clear positive by economists like TD's Leslie Preston.

"This was another step in the right direction and in inflation starting to come down, so I was relieved to see it move in the right direction," Preston told CBC News.

More recently, we've seen Canada's economic growth data come in weaker than expected.

Weak GDP bolsters case for pause in rate hikes

GDP growth ground to a halt through the fourth quarter of last year. Economic growth flat-lined to end the year, coming in at precisely zero per cent.

December's monthly numbers actually showed a contraction. That means businesses didn't sell as much and consumers scaled back.

Counterintuitive though it may seem, that bad economic news may be the good news that variable rate mortgage holders have been waiting for.

"[This] mostly soft report won't be a disappointment to policy-makers, as the Bank of Canada is openly attempting to take some steam out of the economy," wrote BMO's chief economist Doug Porter. "And zero-point-zero growth is about as little steam as one could ask for."

So, he said, the GDP numbers simply "reaffirm" that the Bank of Canada won't increase rates when it announces its rate decision on Wednesday.

"And if growth remains below potential — as we expect — they will likely stay on the sidelines," he wrote in a note to clients.

Profits are up again for Canada's largest food retailer. The Loblaw parent company says it earned nearly 12 per cent more last quarter compared to the same time a year ago, which is raising eyebrows for Canadians struggling with high food prices.

RBC's senior economist Claire Fan agrees that the bank is all but assured to go ahead with its expected pause next week.

Going forward, she said, the jobs market will be one of the things to watch.

Red-hot jobs market too hot for Bank of Canada

Canadian employers added 150,000 jobs in January. That was about 10 times what economists had been expecting.

A consensus of economists believe another 5,000 jobs will be added when February's numbers are released on Friday.

Fan said the real issue isn't just the raw number of jobs being added; it's whether wage growth continues to moderate.

Wages never rose as much as prices did. So workers have actually lost purchasing power over the last two years. Statistics Canada found wage growth peaked last November at 5.6 per cent.

There are signs the Bank of Canada’s plan to slow the economy is working as the gross domestic product has stalled, with a small dip in December, according to new data from Statistics Canada. That could mean a break from rising interest rates for struggling consumers.

Wages have now stabilized at about 4.5 per cent or so.

Fan said the central bank will look for that to moderate further. "If it's still coming down, that's probably enough to keep the Bank of Canada at its current position," she told CBC News.

So GDP is slowing, inflation is decelerating and wage growth is moderating.

None of that is particularly good news for workers. But economists agree it should be enough to convince the Bank of Canada to make good on its pause and finally give a bit of a break to households struggling with rising debt payments and looming mortgage renewals.