The question on everyone’s mind after this week’s Fed rate hike

We all need to keep watching the headlines — especially with oil, AI’s growth impact and the market’s reaction to the budding U.S. fiscal crisis. Photo by Kevin Dietsch/Getty Images

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That includes economists, some of whom were calling for Bank of Canada rate cuts earlier this year and have since done a full 180, now predicting hikes will come sooner than expected. (Gotta love forecasting: where conviction has a shelf life of about six months.)

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But there’s a wrinkle. The Bank of Canada’s preferred inflation gauge — average core inflation — is still sitting below target at 1.95 per cent. So some skeptics don’t see enough pass-through from oil, tariffs and the rest to justify a serious hiking cycle.

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Predicting how much rates will rise is a great way to become a screenshot on social media, so I’ll pass.

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But here are three things that might help you size up your rate risk.

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#1. Don’t let low core inflation fool you

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The fact that our central bank’s favourite inflation measure is sitting below two per cent doesn’t mean a hike is off the table.

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I went back through the record and found 38 instances where Canada’s prime rate rose even with core inflation at or below 2.0 per cent.

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They came in clusters — 1992–2000, 2002–2006, 2010, and 2017–2018 — all periods when core inflation ran persistently below target, meaning the central bank was tightening largely for other reasons.

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#2. The Bank of Canada doesn’t hike just once

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If a hiking cycle does arrive, don’t expect our central bank to stop at one. It never has.

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Governor Tiff Macklem all but confirmed as much at his Sept. 2 press conference, saying to expect “more than one increase” if tightening begins.

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History, since the dawn of inflation-targeting, shows hiking cycles last about 2.5 years on average, with the Bank of Canada hiking just over 2.75 percentage points over that stretch.

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That said, plenty of people think this cycle won’t need to be an “average” one, given:

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Deep hiking cycles are usually the central bank’s answer to an overheating economy, and overheating is not exactly our problem right now.

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Here’s some other context to anchor expectations:

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