October 2022 - Bank of Canada Rate Announcement
Updated: Jan 25
Today , the BoC increased its target overnight rate by 0.50% to 3.75%. This was lower than the 0.75% increase expected by most. The Bank is also continuing its monetary policy of quantitative tightening.
What is the Target Overnight Rate? This is a key BoC-co ntrolled interest rate used as a basis for overnight borrowing between major lenders and financial institutions. This rate plays a pivotal role in influencing the economy. When the overnight rate is increased by the central bank, it becomes more expensive for banks to borrow money from one another, increasing their total cost, so banks pass increased cost onto the consumer by increasing the Prime rate. The Bank of Canada has so far hiked its overnight target rate by 3.50% this year, bringing it to 3.75%. Economists are currently expecting the Bank to end this rate-hike cycle at anywhere between 4% and 4.50%. Why did the BoC increase this rate? The Canadian economy continues to operate in excess demand with a tight labour market. The demand for goods and services still outstrips the ability of the economy to be able to supply them and this leads to increased pressure on inflation. Hence, the strategy of the BoC to temper the demand side by increasing interest rates. These tightening monetary policies and quantitative tightening by the BoC are a balancing act - too much runs the risk of pushing the Canadian economy into a recession and too little will allow inflation to run unabated and cause even bigger economic problems. Inflation Worldwide Global inflation is expected to decline as tighter monetary policies aimed at combatting inflation are weighing on economic activity around the world. The strong USD continues to fan worldwide inflation. The BoC foresees no economic growth in US economy through most of 2023 and sees the economies in the Euro-zone contracting in the coming quarters due to acute energy shortages. China’s economy grew by 3.90% in the 3rd quarter of 2022 even against the backdrop of tight COVID lockdowns and the huge challenges that face their property market. The Canadian Economy The BoC expects the Canadian economy to stall through the end of this year and the first half of 2023 due to a drop in housing activity, decreased spending by households and businesses and the decrease in exports due to the slowdown of international demand. The BoC projects GDP growth will slow from 3.75% this year to just under 1% next year and 2% in 2024. Inflation Expectations The BoC expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023, and then return to the 2% target by the end of 2024. Looking to the Future If you currently have a variable or adjustable rate mortgage and you're not sure whether to convert to a fixed rate term, please reach out to us. If you are considering purchasing in the next 6 months, or if your mortgage is maturing in the next 6 months, now is a great time to reach out to us so that we can discuss your options. Please feel free to reach out to us if you have questions at all. Warm regards, Keith Baker | firstname.lastname@example.org | 604.723.5363 Jackie Zerbe | email@example.com | 604.724.6982 TotalMortgage.ca