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 1.5 percent, up from 1 percent since April 2022. The Bank of Canada is continuing its quantitative tightening (QT) policy that began at the end of April, 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?
Canadian GDP growth reached 3.1 percent in the first quarter of 2022, which was in line with the projections of the Bank’s April Monetary Policy Report (MPR).
The global economy is beginning to slow and there is a widespread increase in global inflation. Some of the factors contributing to this are the Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions.
High prices for energy and food has caused the continued rise of inflation both in Canada and across the globe. CPI Inflation for the month of April soared well above the Bank’s forecast to 6.8 percent. It is likely that CPI Inflation will continue to rise in the short term before beginning to level off.
Inflation continues to broaden and the risk of elevated inflation becoming entrenched has risen. Core measures of inflation are ranging as high as 5.1 percent and almost 70 percent of CPI categories are showing inflation above 3 percent. The Bank will continue to work to keep inflation expectations steady by using its monetary policy tools.
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 activity in the housing market is coming down from its previously high levels.
Exports continuing to strengthen and consumer spending remaining elevated contribute to the expectation that growth will remain solid in the second quarter, however the economy is experiencing excess demand.
With this excess demand in the economy, combined with the expectation that inflation will continue to move higher in the short term, it is very likely that interest rates will rise further.
Will there be any Interest Rate Changes in the Near Future?
The next rate announcement will be published on July 13, 2022 with interest rates expected to increase even further at that time. The Governing Council continues to believe interest rates will need to rise further due to the economy’s excess demand and inflation continuing to persist well above the target. The Bank is continuing their commitment to achieve the 2 percent inflation target. In order to meet its commitment, the Governing Council is prepared to act more forcefully if needed.
