Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa
Governor of the Bank of Canada Tiff Macklem walks outside the Bank of Canada building in Ottawa, Ontario, Canada June 22, 2020. Reuters

The Bank of Canada is expected to hike its benchmark overnight rate on Wednesday to its highest level in 14 years as it seeks to tame inflation, and it may signal its tightening cycle is near an end as the economy begins to slow, analysts said.

In the past nine months the central bank has cranked up borrowing costs at a historically fast pace - by 350 basis points to 3.75% - and it will go higher when the decision is released at 10 a.m. ET (1500 GMT).

Governor Tiff Macklem has repeatedly said interest rates must rise further, and he has opened the door to an increase of a quarter of a percentage point following multiple oversized hikes in recent months, including 50 basis points in October.

"It's a close call but we're expecting a 50-basis-point rate hike from the Bank of Canada," Benjamin Reitzes, Canadian rates and macro strategist at BMO Capital Markets, said in a note.

"While peak inflation might be behind us, the risks remain skewed to the upside, with a non-trivial possibility that inflation is stickier than expected."

Money markets are betting on a 25-basis-point increase, but a slim majority of economists in a Reuters poll expect a larger move.

Inflation, at 6.9% in October, is still running over three times the central bank's 2% target, and the economy grew at an annualized 2.9% rate in the third quarter.

But a falling property market and one of the highest household debt-to-income ratios in the world mean the economy is sensitive to rate increases.

If the bank's tightening campaign overshoots, it could trigger a deeper downturn than expected, something that the bond market is now signaling is a risk.

In October, the Bank of Canada forecast that economic growth would stall from the fourth quarter this year through the middle of next year.

"Whether or not the Bank of Canada raises rates 25 or 50 basis points, there's a separate question about whether the Bank of Canada can or should really be committing to raise rates further in 2023," said Royce Mendes, head of macro strategy at Desjardins Group. "It's not so clear - given the lag in monetary policy - that that is necessary."

The bank has been providing forward guidance that it "expects that the policy interest rate will need to rise further" since it began this tightening cycle. Some analysts say it might be time to drop that language and open the door to pausing rates.

"At some point, the Bank of Canada is going to be in a position where it's appropriate to just let rates be for a while," Mendes said.