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Bank of Canada raises its benchmark interest rate to 3.25%
Sep 7, 2022
The Bank of Canada increased its overnight benchmark interest rate by 75 basis points to 3.25% from 2.50%. This is the fifth time this year that the Bank has tightened the money supply to combat inflation. While the latest increase was comparatively smaller than the move made in July (100 basis points), it is bigger than the changes made in March (+0.25%), April (+0.50%), and June (+0.50%).
Moreover, the Bank stated it is not finished hiking its policy interest rate just yet and noted that central banks around the world also continue to tighten monetary policy.
These are the highlights of todays announcement.
Inflation at home and abroad
In Canada, CPI inflation eased in July to 7.6% from 8.1% because of a drop in gasoline prices; however, inflation (excluding gasoline) increased and data indicate a further broadening of price pressures,, particularly in services
The Banks core measures of inflation continued to move up, ranging from 5% to 5.5% in July
Surveys suggest that short-term inflation expectations remain high domestically and the longer this continues, the greater the risk that elevated inflation becomes entrenched
Global inflation remains high and measures of core inflation are moving up in most countries
Economic performance at home and abroad
The Canadian economy continues to operate with excess demand and domestic labour markets remain tight
Canadas GDP grew by 3.3% in the second quarter somewhat weaker than the Bank had projected but indicators of domestic demand were very strong. Canadian consumption grew by approximately 9.5% and domestic business investment was up by almost 12%
Commodity prices have been volatile: oil, wheat, and lumber prices have moderated while natural gas prices have risen. Economic activity in the United States has moderated, although the U.S. labour market also remains tight. China is facing ongoing challenges from COVID shutdowns
Canadian housing market
With higher mortgage rates, the housing market is pulling back as anticipated following unsustainable growth during the pandemic
The Bank expects the Canadian economy to moderate in the last half of 2022 as global demand weakens and tighter monetary policy begins to bring demand more in line with supply.
However, given the outlook for inflation, the Banks Governing Council continues to note that its policy interest rate will need to rise further.
To underscore its current thinking, the Bank wrote that it remains resolute in its commitment to price stability and will continue to take action as required to achieve a 2% inflation target.
On the bright side, the Bank offered that as the effects of tighter monetary policy work through the economy, it will be assessing how much higher interest rates need to go to return inflation to target.
October 26, 2022, is the BoCs next policy announcement date at which time it will also make its fourth Monetary Policy Report of the year available for review. As always, First National will follow this seminal event. For other capital market insights, please stay tuned to the Resources page of our website on a regular basis.
Bank of Canada increases policy interest rate by 75 basis points, continues quantitative tightening
The Bank of Canada today increased its target for the overnight rate to 3%, with the Bank Rate at 3% and the deposit rate at 3%. The Bank is also continuing its policy of quantitative tightening.
The global and Canadian economies are evolving broadly in line with the Banks July projection. The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.
Global inflation remains high and measures of core inflation are moving up in most countries. In response, central banks around the world continue to tighten monetary policy. Economic activity in the United States has moderated, although the US labour market remains tight. China is facing ongoing challenges from COVID shutdowns. Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen.
Prices have come down from their peak in July
From the National Bank of Canada
Declining transactions in the resale market and rising interest rates continue to weigh on property prices, with the Teranet-National Bank Composite House Price Index falling 0.2% from June to July after seasonal adjustments. This is the first monthly decline since the one seen at the beginning of the pandemic in June 2020. Using the unsmoothed seasonally adjusted index, which is more sensitive to market fluctuations, the decline is even more pronounced, with property prices falling 1.4% from June to July. Moreover, price decreases continue to be widespread across the country. In fact, for all 32 markets where the seasonally adjusted unsmoothed index was available in July, 58% experienced a decline during the month, the same proportion as observed in June, but much higher than those recorded since the beginning of the year. You have to go back to May 2020, at the very beginning of the pandemic when uncertainty was at its peak, to find such a large proportion of markets down. While the Bank of Canada has indicated that it will continue to raise its policy rate and that transactions in the real estate market should continue to decline, we anticipate that the composite index should decrease by 10% by the end of 2023.