The Bank of Canada (BOC) has raised the overnight rate for the first time since October 2018.

Darcy DoyleBlog, Interest Rates, Market Update, News and Events

Bank of Canada rate announcement

The Bank of Canada today increased its target for the overnight rate to 0.5% from its previous 0.25% where it has been since March 2020. This change will roughly equate to an increase of $12 per every $100,000 borrowed, depending on the Lender. The Bank is continuing its reinvestment phase, keeping its overall holdings of Government of Canada bonds on its balance sheet roughly constant until they deem it appropriate to begin allowing the size of its balance sheet to decline.

Fixed mortgage rates have been rising steadily since late last year, but this week it’s variable-rate holders who will begin noticing the effects of rising rates. Despite the market uncertainty unleashed by the current geopolitical crisis in Ukraine, the Bank’s hands appear to be tied given the headline inflation in January soared to a 30-year high of 5.1%.

“The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased. The situation remains fluid and we are following events closely.” (The Bank of Canada)

Important takeaways:

Economic Slack Recovery and Global Supply Constraints

The majority of the BOC’s January predictions have been realized with the pandemic beginning to ease and global economies have been recovering at a quicker pace than anticipated. Global supply bottlenecks remain challenging, although there are indications that some constraints have eased.
Economic growth in Canada exceeded expectations in the fourth quarter of last year at 6.7%, confirming the Bank’s view that economic slack has been, for the most part, absorbed.

Labour Market

A pressing concern for the BOC was the state of the labour market as the Omnicron variant had greatly affected progress at the start of this year with temporary layoffs in service sectors and elevated employee absenteeism. However, we’ve quickly turned concerns around as we continue to show resilience. As public health restrictions continue to be lifted, the labour concerns should diminish further. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.

CPI Inflation

A pressing concern for the BOC was the state of the labour market as the Omnicron variant had greatly CPI inflation is currently at 5.1%, as expected in January, and remains well above the Bank’s target range. Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. Additionally, the invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.

What some of the leading banks are predicting moving forward:

Royal Bank of Canada’s predictions

“Moving forward, households will have ample purchasing power for spending…backed by sharply improved labour market prospects and elevated savings. The wind-down of virus containment measures will support further recovery in demand for hospitality and travel services. The heated housing market and rising energy prices that have driven price growth to date are expected to remain elevated, at least in the near term. Against that backdrop, the Bank of Canada is widely expected to begin hiking interest rates in March and we could see a follow-up hike as soon as April.” (Source)

TD Bank’s predictions

“The BoC is positioned to execute on a relatively swift rate hiking cycle. We see it front-loading rate hikes such that the policy rate reaches above 1% by this summer and hits 1.75% in early 2023. This endpoint of 1.75% is at the bottom of the BoC’s range for the neutral rate of interest.” (Source)

When’s the Next Rate Announcement?

Upcoming Bank of Canada Announcement Dates

  • Wednesday, April 13*
  • Wednesday, June 1
  • Wednesday, July 13*
  • Wednesday, September 7
  • Wednesday, October 26*
  • Wednesday, December 7

*Monetary Policy Report published

Rate announcement increases overnight rate to 0.5%