Bank of Canada likely to raise rates again Wednesday — but should it?

The Bank of Canada is widely expected to raise its trend-setting interest rate this week by a quarter of a percentage point, which would bring it to 4.5 per cent.

If it happens, it'll be the eight time in a row that the bank has opted to hike its benchmark rate, which makes borrowing money more expensive for consumers and businesses.

But for the first time in almost a year, there isn't a solid consensus among those who watch the central bank that another hike is in the cards — or even whether one should be.

The bank is locked in a battle to wrestle inflation into submission, and it believes rate hikes are the best weapon at its disposal to win that war.

It's a war that's racked up a lot of collateral damage, including in the housing market, where average prices are down by 20 per cent since February. Other forms of consumer debt, such as credit cards, rising to record levels, too.

Even so, the rate hikes have so far only succeeded in bringing inflation down from a 40-year high above eight per cent last summer to 6.3 per cent last month.

That's still twice as high as the upper limit of the range the bank likes to see, which is why a majority of economists think another hike is in the offing. But Pablo Villanueva, an economist with Swiss Bank UBS is among those who thinks the best thing the Bank of Canada could do might just be nothing at all.

"The data since December has shown an economy that is weakening," he said, noting that Canada's GDP likely only grew by about one per cent in the fourth quarter of 2022. That's well down from the three per cent average for the rest of the year. Wage gains and the employment numbers paint a similar picture.

A pair of the bank's own reports from earlier this month are also singing from the same songbook, with a majority of consumers and businesses telling the central bank they now expect the economy to go into recession this year.

Villaneuva says the recent data points on Canada's GDP and the recent surge of layoffs add up to make a pretty compelling case to stand on the sidelines for a while.

"We think that this weaker outlook for the economy and inflation should give the Bank of Canada confidence that it can hold off on further hikes at least in the near term," he said.

A major reason to stand pat is that it typically takes between six months to a year and a half for the full impact of rate hikes to be felt anyway.

"We recognize that we have raised interest rates rapidly and that their effects are working their way through the economy," Sharon Kozicki, deputy governor of the Bank of Canada, told a Montreal business audience last month.

"In other words, we are moving from how much to raise interest rates to whether to raise interest rates," she said.