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 2.5 percent, up from 1.5 percent since June 2022. The Bank of Canada is continuing its quantitative tightening (QT) policy that began at the end of April. With the economy in high and broadening inflation, the Governing Council decided to front-load the path to higher interest rates by increasing the policy rate by 100 basis points.
What Information did the Bank Share about the Economy?
- Canada is experiencing higher and more persistent inflation than the Bank originally predicted in its April Monetary Policy Report (MPR). The Bank is now expecting inflation to hold around 8 percent for the next few months.
- As the war in Ukraine and supply disruptions continue, we are experiencing elevated pressure on domestic prices as a result of excess demand. These elevated price pressures have caused the Bank’s core measures of inflation to increase to between 3.9 percent and 5.4 percent.
- Surveys have shown that many consumers and businesses are expecting inflation to remain high for longer than expected. This raises the risk that this elevated inflation becomes deep-rooted in price and wage setting. If this were to happen, restoring price stability would have a much greater economic cost.
- Strong excess demand has grown the Canadian economy. We are seeing record low unemployment rates, widespread labour shortages, and increasing wage pressures. Since there is such high demand, businesses are raising their prices in order to pass on the higher input and labour costs to the consumer.
- The Bank now expects global economic growth to slow to about 3.5 percent this year and 2 percent in 2023 before strengthening to 3 percent in 2024.
- GDP growth is expected to slow to about 2 percent in the third quarter which is down from the 4 percent GDP growth of the second quarter.
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.
- There is an expected decline in housing market activity as it slows down from the unsustainable highs during the pandemic.
- Oil prices will likely remain high
- As tighter monetary policies come into play, global growth will moderate and economic activity will slow. This along with the recovery of supply disruption will help to bring supply and demand back into balance. The Bank is expecting Canada’s economy to grow by 3.5 percent in 2022, 1.75 percent in 2023, and 2.5 percent in 2024. The current forecast has inflation starting to decline later this year, and eventually easing to about 3 percent at the end of 2023, and hitting the 2 percent target by the end of 2024.
Will there be any Interest Rate Changes in the Near Future?
The next rate announcement will be published on September 7, 2022 with interest rates expected to increase even further at that time. The pace of further increases will be based on ongoing evaluations of inflation and the economy. The Governing Council remains committed to price stability as well as achieving the 2 percent inflation target, and will continue to take action as required to meet these commitments.
