After seven consecutive rate hikes, the Bank of Canada signalled Wednesday that it would pause its rate hike campaign in the new year. However, policymakers will still consider raising the policy interest rate to achieve a balance between supply and demand. This decision comes after a 50 basis point increase in the overnight rate to 4.25%.

The Bank of Canada’s decision to pause in its aggressive rate hike campaign signals the possibility that the economy is weakening. Its statement also reveals that the Governing Council has noticed a gradual cooling in demand. That could mean a slower growth rate in the first half of next year. While the economy’s growth is forecast to slow to just less than one per cent in 2019, the unemployment rate is at historic lows.

As part of its Governing Council’s consideration of the future of rate hikes, the BoC will also be considering its quarterly Business Outlook Survey and Canadian Survey of Consumer Expectations. Both data will offer important information to the BoC as it tries to balance the economy’s supply and demand.

The economy has been operating in excess demand, causing the inflationary pressures to build. The high consumer price index is at 6.9 per cent, which is three times the 2-percent target set by the central bank. There’s also been a slowing in housing activity. Fortunately, a strong population in eastern Canada will keep consumer spending going.

Still, there are concerns about a softer labour market and weaker economic growth. The Bank of Canada noted that there are growing indications that higher rates are restraining demand.

In the past, the bank has emphasized that the economy will remain resilient. That is because the rate hikes haven’t slowed the economy as expected, and the unemployment rate has remained near historic lows. Nonetheless, the BoC remains committed to taming high inflation. But the question of when to stop hiking remains a thorny issue.

Markets initially responded by jumping on the news of the Bank of Canada’s decision. Initially, the 2-year yield jumped 10 bps in intraday trading. Eventually, it closed marginally lower at 3.78%. At this point, the inversion in the Canadian yield curve has hit its widest point since the early 1990s.

However, the rise in the loonie did little to spur any reaction in the U.S. and UK markets, where the pound rose to session lows of 1.365 and the euro fell to a two-month low of 1.006. These data, along with a steady economy, has put the TSX on the road to recovery. A reversal in rates would only add to the negative sentiment that has plagued the stock market.

Several analysts, including Western University economics professor Stephen Williamson, said the Bank of Canada’s move was larger than anticipated. They pointed to the effects of prior rate hikes, which have slowed broad-based price pressures.

The Canadian Imperial Bank of Commerce’s chief economist said the effects of the hike would stall economic growth. He cited high debt loads in the provinces of B.C. and Ontario, which make residents and businesses especially sensitive to the interest rate increases.