What Does the Bank of Canada do?
Eight times per year, the Bank of Canada (BOC) makes a scheduled announcement about their benchmark lending rate based on data they have assessed about the current state of the Canadian economy. Any change to this rate indicates a possible change to corresponding rates, such as interest rates for mortgages and additional types of consumer loans. This is because the rate set by the bank will directly affect prime rates offered by banks and other financial lenders. For more information, take a look at our blog post breaking down four of the most frequently asked questions regarding the BOC.
Were there any Changes to the Interest Rate?
The overnight lending rate has increased to 1 percent, up by 0.5 percent since March 2022. The Bank of Canada is ending its reinvestment stage and will begin quantitative tightening (QT) starting April 25, allowing the size of the balance sheet to decline over time due to maturing Government of Canada bonds no longer being replaced.
What Information did the Bank Share about the Economy?
- The ongoing situation in Ukraine has caused increased economic uncertainty as the price of oil and other commodities rises, further adding to inflation. There are also many supply constraints as a result of the war. These factors have caused the Bank of Canada to alter its perspective on inflation in Canada.
- The Canadian economy is showing strong growth, however many businesses are reporting they are unable to meet consumer demand. Increases in the cost of inputs is being offset by increased prices.
- With many of the existing restrictions being lifted across Canada, consumer spending is continuing to strengthen. As there continues to be strong foreign demand, exports and investment in businesses will pick up.
- Largely driven by the rise in energy and commodity prices and supply disruptions, CPI inflation in Canada is above the Bank’s previously forecasted levels, and currently sits at 5.7 percent.
- The new expectation is that CPI inflation will average close to 6 percent for the first half of 2022 and remain well above the control range throughout this year. Once we reach the second half of 2023, CPI inflation is expected to begin to ease to 2.5 percent, and then return to the 2 percent target rate in 2024.
How does this Impact Me?
- Variable rate mortgage holders can expect an immediate increase to the prime rate offered by your lender. Depending on your mortgage, this may increase your mortgage payments or decrease the amount of your payment that goes toward the principal balance of your mortgage.
- It is expected that housing market activity will come down from current levels, which are exceptionally high. Rate increases by the Bank of Canada reduce buying power for potential homeowners, limiting their bids. Smaller bids, in turn, should reduce selling prices for homes on the market.
- The forecast for the Canadian economy by the Bank is continued growth for this year, with a slight decline in growth over the next couple of years. Higher interest rates should moderate growth in domestic demand, while growth in labour productivity and higher immigration will likely add to the economy’s productive capacity.
Will there be any Interest Rate Changes in the Near Future?
The next rate announcement will be published on June 1, 2022 with interest rates expected to increase even further at that time. The Governing Council predicts that interest rates will need to rise further due to the economy moving into excess demand and inflation persisting well above the target. There is worry that the expectations of elevated inflation will be confirmed. The Bank will use its available policy tools to keep inflation well-anchored, and are continuing their commitment to achieve the 2 percent inflation target.