Bank of Canada raises its overnight rate and announces a pause

On Wednesday, the central bank raised its key lending rate for the eighth time in a row, signalling that it could be the last increase in this cycle. The Bank of Canada plans to take a pause and assess the influence of its sharp tightening.

Governor Tiff Macklem raised the overnight rate by 0.25% to 4.5% – it’s the highest level in almost 15 years.

Although the increase itself was expected, neither markets nor economists thought the BoC would announce a possible final point this time.

Inflation is expected to return to the 1-3% range by the middle of this year and to get back to the Bank’s target level of 2% next year. Officials see 3 months of declining numbers as proof that core inflation has already reached its peak.

In its quarterly monetary policy report, the central bank says the national economy keeps overheating. However, growth is expected to slow down sharply as rate increases affect household spending and help bring inflation back to the Bank’s target range.

“In case economic developments evolve in line with the Bank’s outlook, we plan to keep the overnight rate at its current level,” – the Bank of Canada stated.

Nevertheless, policymakers warned about more possible increases if economic data shows unexpected growth. The central bank “is ready to raise the policy rate if it’s necessary to return inflation to the 2% target level.”

This conditional pause, which is the first among Group of Seven central banks, means that policymakers are sure today’s rate is restrictive enough for price stability to recover.

The BoC raised its forecast for economic growth in 2022 to 3.6 %, while this year a 1% gain is expected. Meanwhile, October’s forecast pointed to 3.3% and 0.9%, respectively. Still, the possibility of two quarters of negative growth in a row (a technical recession) is almost the same as small growth this year.

However, Canadian households, showing one of the highest debt levels among advanced countries, keep feeling the hits from higher rates and growing prices for shelter and food. Canada’s real estate market activity has slowed significantly, and consumer spending is expected to keep falling.

Only 14 months ago, variable rate borrowers were benefitting from record-low rates, with Prime rate at 2.45% and factual interest on certain discounted variable mortgages even lower than 1%!

Tomorrow, Prime rate will rise to 6.70%. The last time we saw such numbers was 2001.

It means that monthly payments on an average adjustable-rate mortgage will go up by about $14 on every $100,000 of mortgage debt.

The good news for variable mortgage holders is that markets believe the central bank will reduce its key lending rate in October, according to the overnight index swap. But such forecasts should be considered quite skeptically, as they tend to change fast.

The next BoC’s rate meeting is scheduled for March 8.




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