Bank of Canada expected to announce another oversized rate hike as borrowing costs begin to bite

Bay Street forecasters and financial markets are betting the central bank will raise its overnight rate by 75 basis points Wednesday

. That would lift the benchmark rate to 3.25 per cent, a restrictive level where monetary policy acts as a drag on the overall economy.

Home sales and prices have fallen sharply from their peak earlier this year, while preliminary data from Statistics Canada suggests the country’s gross domestic product contracted in July. The job market also appears to be cooling, with about 74,000 jobs lost in June and July. Several financial institutions, including Royal Bank of Canada and Desjardins, have said the central bank’s rate hikes will likely push the Canadian economy into a recession in 2023.

“While higher interest rates, slower growth and softer labour-market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Mr. Powell said.

“Global factors and energy prices falling out of inflation, that’s the low-hanging fruit,” said David Watt, chief economist at HSBC Canada, in an interview. All eyes will be on Wednesday’s rate decision statement for hints about the future and the possible end point, or “terminal rate,” of this interest rate cycle. Most private-sector economists expect a terminal rate of between 3.5 per cent and 4 per cent.

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