So many words below!! TL;DR …
The Bank of Canada increased the key policy rate by 0.50% this morning moving the rate higher to 3.75%.
The commercial bank Prime interest rate will move higher from 5.45% up to 5.95%.
For context, the last time Canada’s commercial Prime interest rate was this close to 6% was 2006-2008.
Here is the commentary from the Bank of Canada press release which alludes to what the near term future of interest rates might hold…
| Inflation around the world remains high and broadly based. This reflects the strength of the global recovery from the pandemic, a series of global supply disruptions, and elevated commodity prices, particularly for energy, which have been pushed up by Russia’s attack on Ukraine. The strength of the US dollar is adding to inflationary pressures in many countries(This is something to closely watch as non-commodity exporting countries feel even more pain). Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world. As economies slow and supply disruptions ease, global inflation is expected to come down (It seems like we’ll get inflation down folks—the question is at what angle?). |
In the United States, labour markets remain very tight even as restrictive financial conditions are slowing economic activity. The Bank projects no growth in the US economy through most of next year (Canada is a G7 nation, but a rather small global economy—our monetary policy makers are looking at the U.S. and our own country). In the euro area, the economy is forecast to contract in the quarters ahead, largely due to acute energy shortages (This will be interesting to see how commodity markets change this winter). China’s economy appears to have picked up after the recent round of pandemic lockdowns, although ongoing challenges related to its property market will continue to weigh on growth. Overall, the Bank projects that global growth will slow from 3% in 2022 to about 1½% in 2023, and then pick back up to roughly 2½% in 2024. This is a slower pace of growth than was projected in the Bank’s July Monetary Policy Report (MPR). |
In Canada, the economy continues to operate in excess demand and labour markets remain tight. The demand for goods and services is still running ahead of the economy’s ability to supply them, putting upward pressure on domestic inflation (What do you personally think about this—are you spending less or about the same compared to pre-pandemic personal budgets?). Businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services. |
The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening (Indeed, major Real Estate markets in Canada (TO/VAN) are down). Also, the slowdown in international demand is beginning to weigh on exports. Economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy. The Bank projects GDP growth will slow from 3¼% this year to just under 1% next year and 2% in 2024. |
In the last three months, CPI inflation has declined from 8.1% to 6.9%, primarily due to a fall in gasoline prices (Right direction at least). However, price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched (With the market consensus rate hike of 0.75% not being announced, will a 0.50% rate hike allow inflation and inflation expectations to keep their foot in the door?). |
The Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023, and then return to the 2% target by the end of 2024 (Let’s be reminded about these predictions—nobody in the world knows what will happen). |
Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. (Plan for another rate hike at the BoC announcement on December 7th). Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding (I joked with my friends during the pandemic we had to go out and spend to save the economy. Now I’m joking about not spending to slow inflation). Quantitative tightening is complementing increases in the policy rate (This means the BoC is purchasing less government of Canada bonds. This lowers the price of bonds, which increases bond yields—higher bond yields equal higher fixed Mortgage rates). We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.I hope this press release summary was helpful! Talk soon, Chad Moore |
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