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?
Today is the first Bank of Canada announcement of 2023. The overnight lending rate has increased to 4.50 percent. The Governing Council made the decision to increase the interest rate 25 basis points largely due to persistent excess demand putting further upward pressure on prices. On a positive note, it seems that today’s rate increase may be the last one for the foreseeable future.
What Information did the Bank Share about the Economy?
- Many countries are experiencing a decrease in inflation, mostly due to lower energy prices and improvements in global supply chains.
- The ongoing conflict in Ukraine continues to be a major source of uncertainty.
- Since October, the Canadian dollar has remained fairly stable against the US dollar and financial conditions are beginning to ease.
- Canadian economic growth has exceeded expectations while the economy remains in excess demand
- The Bank estimates Canada’s economy grew by 3.6 percent in 2022, slightly better than what was predicted in October. The growth is expected to slow down during the middle of 2023, but pick up again later in the year. The bank predicts that the GDP growth will be around 1 percent in 2023 and 2 percent in 2024, which is similar to the October’s forecast.
- CPI inflation is projected to come down this year to around 3 percent by the middle of this year and then back to the 2 percent target in 2024. High interest rates, lower energy prices, and improvements in global supply conditions will likely all contribute to the decrease of inflation.
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.
- The job market remains competitive, with unemployment close to record lows and businesses reporting difficulty in hiring employees. However, there are indications that restrictive monetary policies are impacting economic activity, particularly household spending.
- Growth in consumer spending has slowed down compared to the first half of 2022 and there has been a significant decrease in housing market activity. As the impact of rising interest rates continues to affect the economy, it is expected that spending on consumer services and business investments will also decrease.
- Weaker demand from foreign markets is likely to negatively impact exports. Despite this, the overall decrease in activity will help balance supply and demand.
- Inflation has dropped from 8.1 percent in June to 6.3 percent in December, causing lower gasoline prices and moderating the cost of durable goods. Despite this improvement, Canadians are still struggling with the financial burden of high inflation on their basic household expenses such as food and shelter.
Will there be any Interest Rate Changes in the Near Future?
The next rate announcement will be on March 8, 2023. Assuming that the economy develops as expected, the Governing Council expects to keep the policy rate at its current level while monitoring the effects of previous interest rate increases. If necessary, they are prepared to raise the policy rate further to reach the 2 percent inflation target, and remain committed to restoring price stability for Canadians.