Three key things to watch in the Bank of Canada’s September rate decision

The Bank of Canada has embarked on a series of supersized rate hikes this year in a bid to tame inflation but its upcoming policy rate decision on Sept. 7 comes as the economic picture has started to shift Ahead of this week's decision, economists and market analysts are asking some important questions.

How high will the bank go?

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The Bank of Canada is expected to raise its policy rate by 75 basis points, bringing it up to 3.25 per cent and keeping its aggressive path of rate hikes going.

Most economists agree that the Bank won't hike by less than 50 basis points. A rate hike of this size would put the chance of a full-percentage-point hike at 20 percent.

What’s the impact if they do go beyond the neutral range?

A 75 or 100 basis point hike would break the Bank's theoretical neutral range of two to three per cent, the interest-rate range that would stoke neither or hinder economic growth. The Canadian economy is more sensitive to higher interest rate increases than other G7 countries due to higher household debt.

The Canadian economy's out performance in the first half might be fleeting. Businesses were rebuilding inventories after the worst of the supply-chain disruptions and services spending was coming back from lockdowns. The growth we've seen is not sustainable.

The neutral range is no longer relevant since the economy is facing many tailwinds and inflation is high. The Bank of Canada's statement would leave the door open to further rate hikes, but the central bank will have to abandon the "soft landing" narrative as recession risks rise.

At the Jackson Hole symposium in August, the U.S. Federal Reserve chairman suggested that central bankers were prepared to trade off economic growth for a pull-back in inflation. In an August column for National Post, the Bank of Canada governor said that even though higher interest rates had helped bring inflation down to 7.6 per cent from 8.1 per cent, his work was not done.

Pursuing lower inflation with the same tenacity as the U.S. would spell out more pain for Canada's housing-laden gross domestic product, though economists noted that anything less than a 75 basis point hike this week would be seen as dovish and expect further hikes after September's

Ian Pollick, the Canadian Imperial Bank of Commerce's managing director and head of fixed income, has argued that a "narrative shift" could be at hand, with the central bank pausing its aggressive rate hike cycle after hiking by 75 points in September.

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