There is much expectation this week that the Bank of Canada will in two days, pause further rate hikes at its next scheduled announcement in the news few days.

This comes exactly one year after its aggressive rate hike cycle began with local economists widely expecting the central bank will stick to its plan of holding its key interest rate steady at its rate announcement on Wednesday (March 8).

Making its rate decision, the Bank of Canada is likely to feel assured about its move to pause rate hikes, explains Karyne Charbonneau, CIBC’s executive director of economics, based on recent economic data showing inflation is trending downward and the economy has slowed.

“They wouldn’t want to announce a pause and then immediately not go through with (it),” contended Charbonneau. Since last March, the central bank has raised its key rate from near-zero to 4.5 per cent, the highest it’s been since 2007.

While announcing its eighth consecutive rate hike in January, the Bank of Canada said it would take a conditional pause to allow the economy time to react to higher borrowing costs emphasising that the pause was conditional. However, the Central Bank of Canada was quick to point out that it stands ready to jump back in and raise interest rates further if the economy keeps running hot or inflation doesn’t come down quickly enough.

Positive economic signal

The most recent inflation data suggests the country is inching closer to normal price growth. Canada’s annual inflation rate slowed to 5.9 per cent in January, down from the peak of 8.1 per cent reached in the summer. Recent monthly trends show inflation is heading much closer to the Bank of Canada’s two per cent target.

Statistics Canada’s (StatsCan) latest economic report shows the Canadian economy was treading water in the fourth quarter, posting zero growth but beneath the disappointing data was resilient consumer spending keeping the economy afloat. While that report showed a much grimmer economy than forecasters were expecting, a preliminary estimate from the federal agency showed that the economy bounced back in January, posting 0.3 per cent growth.

Meanwhile, higher borrowing costs are weighing on economic activity. RBC assistant chief economist, Nathan Janzen said higher interest rates, which are meant to take the steam out of the economy by encouraging people and businesses to pull back on spending, will eventually squeeze households more noticeably.

Given the Bank of Canada’s last rate hike was just over a month ago, Charbonneau said the full effects on the economy will be felt “much later this year.” Perhaps the one worrying figure for the Bank of Canada was the strong employment numbers for January.

Strong labour market returns

The economy added a whopping 150,000 jobs in the first month of the year, keeping the unemployment level at a low five per cent. While a strong labour market is good news for workers, Bank of Canada governor Tiff Macklem has said repeatedly that the tightness in the labour market is a symptom of an overheated economy that’s fueling inflation.

If demand falters, businesses facing lower sales will likely alter their hiring plans, causing a rise in unemployment.