Bank of Canada Raises Rates 50 bps, More Hikes Likely

What's driving the hikes, and what it means for your mortgage.

Ruth Saldanha 1 June, 2022 | 9:12AM
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Bank of Canada

Today, the Bank of Canada announced an increase in its key interest rate to 1.5% - its third interest rare hike since March this year. And more are expected soon.

Most economists and analysts see another hike in July. The Bank is also continuing its policy of quantitative tightening (QT). The reasons? Inflation caused in part by the war in Ukraine, coupled with strong Canadian economic activity.

“With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool,” the Bank of Canada said in a statement.  It noted, in its press release, that the pace of further increases in the policy rate will be guided by its ongoing assessment of the economy and inflation.

“The Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” it noted. Bank of Canada Deputy Governor Paul Beaudry, will hold a news conference tomorrow to offer insight into the bank’s reasoning and expectations.

Inflation an Ongoing Concern

The Bank acknowledged that inflation globally and in Canada continues to rise, largely driven by higher prices for energy and food, driven by the Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions:  “The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe.”

“In Canada, CPI inflation reached 6.8% for the month of April – well above the Bank’s forecast – and will likely move even higher in the near term before beginning to ease. As pervasive input price pressures feed through into consumer prices, inflation continues to broaden, with core measures of inflation ranging between 3.2% and 5.1%. Almost 70% of CPI categories now show inflation above 3%. The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored,” it noted.

The Bank also noted that the U.S. labour market strength continues, with wage pressures intensifying, and global financial conditions have tightened and markets have been volatile.

Things Looking Up in Canada

The Bank is positive on the Canadian economy, which is driving some of its reasoning.

“Canadian economic activity is strong, and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with the Bank’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid,” it said.

What Can Canadian Investors Do?

“The widely expected interest rate hikes are illustrative of the central bank's continued efforts to control inflation and hopefully also curtail the rapid rise of real-estate prices in Canada. As interest rates continue to rise, investors are reminded to keep a close eye on mortgages and debt to ensure that monthly cashflows are enough to service these debts. Homebuyers specifically will be served well not to overextend themselves, and might do well to consider how much monthly interest payments surmount to assuming rates are higher than currently posted,” says Ian Tam, Morningstar Canada's Investment Specialist.

 

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About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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