January 2023 Interest Rate Hike by Bank of Canada
Contents
The Bank of Canada raised its benchmark interest rate by a quarter of a percentage point, but it said it doesn’t plan to raise rates any further. It was the first major central bank to say it would stop tightening monetary policy.
This is the eighth time in a row that rates have gone up, and the bank’s policy rate is now 4.5%.
In its rate decision statement, the bank said, “If economic developments evolve broadly in line with the [Monetary Policy Report] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” This means that if the economy changes in a way that is mostly in line with the outlook in the Monetary Policy Report, the rate will stay the same.
It said that it is ready to raise rates again “if needed.” At the same time, though, it cut its predictions for inflation. It also said again that it thinks the economy will “stall” in the first half of the year but that it doesn’t think there will be a big recession.
The central bank has reached a turning point with this decision. Over the past year, it has caused Canada’s borrowing costs to rise quickly in order to stop inflation from getting out of control. Now that price pressures are easing and the economy is slowing, the bank has said that interest rates are probably as high as they need to be.
The bank now thinks that the consumer price index will drop to about 3% by the middle of this year and to 2.6% by the end of the year. It thinks that inflation will go back to the target of 2% in 2024.
In December, the annual rate of inflation was 6.3%, which is still well above those levels. But that’s down from its highest point of 8.1% in June. Price pressures keep going down because oil prices are going down and global supply chains are getting better, and because the bank’s rate hikes are slowing down the economy.
In its quarterly Monetary Policy Report (MPR), which came out Wednesday, the bank said that the average price of gasoline has gone down from about $2 a litre last summer to about $1.50 in January.
The Canadian economy is slowing down, which makes it likely that inflation will fall. The bank thinks that growth will stay the same through the first half of 2023. This is because Canadians’ finances will be squeezed by higher borrowing costs, which will hurt consumer spending and business investment. It said that Canada has about a 50/50 chance of having several quarters of negative growth, which is one way to describe a recession.
So far, the Canadian economy has been stronger than most people thought it would be. The unemployment rate is close to a record low, and consumer spending has stayed strong. The bank said, however, that there is “growing evidence that restrictive monetary policy is slowing activity.”
Interest Rates Canada Mortgage
Higher interest rates hurt the housing market in 2022, and people have started spending less on expensive things. The bank thinks that spending will slow down even more as homeowners renew their mortgages at higher interest rates and nervous shoppers cut back on purchases that aren’t necessary.
In the MPR the bank said “The rise in borrowing costs is expected to continue to strain many household budgets. Interest payments on household mortgages are estimated to be about 4.5 per cent of disposable income at the beginning of 2023, up from 3.2 per cent at the beginning of 2022,”
Interest rates are being used on purpose by the bank to slow down the economy and inflation. The goal is to cut spending on goods and services so that total demand and supply are equal. This will ease price pressures.
Interest Rates Canada Forecast
The bank says that there is still “excess demand” in the economy. This is most clear in the job market, where unemployment is low and businesses still have trouble finding enough workers. This is making wages go up and making prices go up, especially in the service sector.
The bank has said that unemployment will have to go up if inflation is to go back to where it should be.
“With the pace of wage growth no longer increasing, the risk of a wage-price spiral has declined. However, unless a surprisingly strong pickup in productivity growth occurs, sustained 4 per cent to 5 per cent wage growth is not consistent with achieving the 2 per cent inflation target, ” the bank said.
The bank said that there are other risks to the inflation outlook. Prices for services could turn out to be more “stickier” than expected. The war in Ukraine and China’s reopening after the COVID-19 lockdowns could also cause oil prices to rise more than expected.
The Bank of Canada raised its benchmark interest rate by a quarter of a percentage point, but it said it doesn’t plan to raise rates any further. It was the first major central bank to say it would stop tightening monetary policy.
Interest Rates Canada Prime
This is the eighth time in a row that rates have gone up, and the bank’s policy rate is now 4.5%.
In its rate decision statement, the bank said, “If economic developments evolve broadly in line with the [Monetary Policy Report] outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases” This means that if the economy changes in a way that is mostly in line with the outlook in the Monetary Policy Report, the rate will stay the same.
It said that it is ready to raise rates again “if needed.” At the same time, though, it cut its predictions for inflation. It also said again that it thinks the economy will “stall” in the first half of the year but that it doesn’t think there will be a big recession.
The central bank has reached a turning point with this decision. Over the past year, it has caused Canada’s borrowing costs to rise quickly in order to stop inflation from getting out of control. Now that price pressures are easing and the economy is slowing, the bank has said that interest rates are probably as high as they need to be.
The bank now thinks that the consumer price index will drop to about 3% by the middle of this year and to 2.6% by the end of the year. It thinks that inflation will go back to the target of 2% in 2024.
In December, the annual rate of inflation was 6.3%, which is still well above those levels. But that’s down from its highest point of 8.1% in June. Price pressures keep going down because oil prices are going down and global supply chains are getting better, and because the bank’s rate hikes are slowing down the economy.
In its quarterly Monetary Policy Report (MPR), which came out Wednesday, the bank said that the average price of gasoline has gone down from about $2 a litre last summer to about $1.50 in January.
The Canadian economy is slowing down, which makes it likely that inflation will fall. The bank thinks that growth will stay the same through the first half of 2023. This is because Canadians’ finances will be squeezed by higher borrowing costs, which will hurt consumer spending and business investment. It said that Canada has about a 50/50 chance of having several quarters of negative growth, which is one way to describe a recession.
So far, the Canadian economy has been stronger than most people thought it would be. The unemployment rate is close to a record low, and consumer spending has stayed strong. The bank said, however, that there is “growing evidence that restrictive monetary policy is slowing activity.”
Higher interest rates hurt the housing market in 2022, and people have started spending less on expensive things. The bank thinks that spending will slow down even more as homeowners renew their mortgages at higher interest rates and nervous shoppers cut back on purchases that aren’t necessary.
Interest Rates Canada 2023
“The rise in borrowing costs is expected to continue to strain many household budgets.” the bank continued in the MPR, “Interest payments on household mortgages are estimated to be about 4.5 per cent of disposable income at the beginning of 2023, up from 3.2 per cent at the beginning of 2022.”
Interest rates are being used on purpose by the bank to slow down the economy and inflation. The goal is to cut spending on goods and services so that total demand and supply are equal. This will ease price pressures.
The bank says that there is still “excess demand” in the economy. This is most clear in the job market, where unemployment is low and businesses still have trouble finding enough workers. This is making wages go up and making prices go up, especially in the service sector.
The bank has said that unemployment will have to go up if inflation is to go back to where it should be.
“With the pace of wage growth no longer increasing, the risk of a wage-price spiral has declined. However, unless a surprisingly strong pickup in productivity growth occurs, sustained 4 per cent to 5 per cent wage growth is not consistent with achieving the 2 per cent inflation target, ” the bank said.
The bank said that there are other risks to the inflation outlook. Prices for services could turn out to be more “stickier” than expected. The war in Ukraine and China’s reopening after the COVID-19 lockdowns could also cause oil prices to rise more than expected.