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 was held at 0.25 percent today. With overall economic slack now absorbed, the Bank has removed its exceptional forward guidance on its policy interest rate. It is also keeping its holdings of Government of Canada bonds roughly the same as it continues through its reinvestment phase.
What Information did the Bank Share about the Economy?
- After an initial decline due to the Omicron variant, oil prices have bounced back and exceeded pre-pandemic levels.
- Activity in the first quarter is largely dependent on the Omicron variant. It is expected that the economic impact will be less severe than previous waves.
- There are increasing expectations that the monetary policy will return to normal levels sooner than expected. This has caused financial conditions to begin tightening up.
- The Bank is projecting global GDP growth to level off from 6¾% in 2021 to about 3½% in 2022 and 2023.
- Canada’s GDP growth in the second half of 2021 proved to be greater than expected. Many measures are now pointing to the fact that economic slack is absorbed.
- With the slack in the economy being absorbed, the Governing Council has now decided to end its extraordinary commitment to hold its policy rate at the effective lower bound.
- Canada saw a GDP growth of of 4½ % in 2021. The Bank is expecting the economy to grow by 4% in 2022 and about 3½ % in 2023
- CPI inflation is expected to remain around 5% for the first half of 2022. This is largely due to continued supply restraints as well as higher food and energy prices.
- At the end of this year, inflation is expected to drop to about 3% as supply shortages disappear. Inflation projections are now higher in the short-term than previously predicted, but long-term expectations are still targeting 2%.
- Monetary policy tools will be used to ensure that the higher short-term inflation expectations do not persist.
How does this Impact Me?
- Rates for variable rate mortgages will not increase as a direct result of today’s announcement.
- Inflation is being pushed up by a strong global demand for goods as well as continued supply constraints.
- Housing prices still have upward pressure due to the continued elevated housing market activity.
- The labour marketed has tightened significantly due to strong employment growth. We are seeing increased job vacancies but employer hiring intentions are strong and wage gains are picking up.
Will there be any Interest Rate Changes in the Near Future?
The next rate announcement will be published on March 2, 2022 with a potential increase to the interest rates expected at that time. With the slack in the economy being absorbed, the Governing Council has now decided to end its extraordinary commitment to hold its policy rate at the effective lower bound. The Governing Council expects interest rates will need to increase, with the timing and pace of those increases guided by the Bank’s commitment to achieving the 2% inflation target.
