Bank of Canada Rate Increase
You are probably used to seeing us use these words, but the Bank of Canada has again raised the key interest rate. The Bank of Canada has decided to increase rates by 0.5. It is a historic year as the Bank of Canada has never had five increases of 0.5% or more in the same calendar year and is the fastest raise of interest rates ever in Canada.
The demand for goods and services is still running ahead of the economy’s ability to supply them, putting upward pressure on domestic inflation. Businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services.
Key interest rate increases are key to tackling this predicament.
The Bad News?
Inflation is still very high, reported at 6.9% in September. People are seeing it in everyday purchases and it is causing stress, anxiety and a dampened wallet. We know this is a hard period. Please refer to a recent blog we wrote for some tips on how to best negate some of these worries.
The Good News?
At the peak, inflation was at 8.1% in June, so it has dropped 1.2% in 3 months which is starting to show promising signs. Although this is promising signs, the Bank of Canada notes that the curve in inflation is mostly due to the fall in gasoline prices.
More good news is that the bank is working towards removing the excess demand from the economy to make the demand more in line with the supply side of the economy.
What Does This All Mean?
Now that the Bank of Canada rate is at 3.75%, that means that we are past the neutral range of 2-3% and entering a key interest rate that actively suppresses economic activity. To figure out the key interest rate to propose, the Bank of Canada looks at many factors, such as the level of debt of households, economic growth and economic confidence, alongside the international economic condition.
The Bank of Canada does not have a completely known key interest rate at what would get it right and take the inflationary pressure off without creating a deep recession.
How Long Will This Last?
Well, history shows that the Bank of Canada Rate Increase rates takes about 3-6 months to show its full effect, but it can be faster when the average consumer chooses a cautious approach of opening their wallet. That basically means that the higher rates are trying to push people into reducing spendings by fear of higher rates and inflation toppling their budget they can afford. If the spending spree reduces, it’ll give companies that are struggling to keep up with production a lull period where they can catch up and this will help regional, national and in a small way, global demand. Global demand will be more balanced if all countries start to take this approach, and we are seeing governments start to take similar methods.
The Bank of Canada projects that GDP growth will slow from 3.25% this year to just under 1% next year and 2% in 2024.
When Will These Hikes Stop?
These hikes are not likely to end until inflation has been curbed to near or under 2%, which is the normal national average of inflation per year. The Bank of Canada anticipates that CPI inflation will move down to about 3% by the end of 2023, and then return to the 2% target by the end of 2023.
The hope is that these rates will work fast, but the Bank of Canada understands it needs to balance the act of curbing inflation and making sure we do not enter a recession, which is why taking a more steady approach is likely. For this reason, we anticipate that more rate hikes will come in the near future. Not only that but the Governing Council expects that the policy interest rate will need to rise further. As always we will update you when those hikes happen and how they will affect you.
Please reach out to us if you have any questions regarding the Bank of Canada Rate Increase and how this may impact you and the future.