Bank of Canada Raises Rates by 1%

The Bank of Canada on Wednesday increased its target for the overnight rate to 2.5%, with the Bank Rate at 2.75% and the deposit rate at 2.5%. Quantitative tightening (QT) continues with no end in sight.

In its statement, the BoC said, “With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today.”

Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months. While the war in Ukraine and supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent.

Over half of the components that make up the CPI are now rising by more than 5%, the BoC noted. With this broadening of price pressures, the Bank’s core measures of inflation have moved up to between 3.9% and 5.4%. Surveys also indicate more consumers and businesses are expecting inflation to be higher for longer, raising the risk that elevated inflation becomes entrenched in price- and wage-setting. Additionally, home owners whose mortgage renews will pay a hefty price. If this occurs, the economic cost of restoring price stability will be higher, the Bank warned.

The BoC also noted that in the United States, high inflation and rising interest rates are contributing to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. According to the economic situation in both China and the US, the Bank now expects global economic growth to slow to about 3.5% this year and 2% in 2023 before strengthening to 3% in 2024.

Canada’s economy is expected to grow by 3.5% in 2022, 1.75% in 2023, and 2.5% in 2024. Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.

If you have any questions on how this rate change can affect your existing mortgage or future plans, please give me a call.