Why does the bank of canada keep hiking interest rates

Why does the bank of canada keep hiking interest rates

Author: Canadian Tailored Mortgage Solutions |

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Continuous Inflation Leads The Bank Of Canada To Increase It's Benchmark Interest Rate

Today, the Bank of Canada increased its overnight interest rate to 5.00% (+0.25% from June) because of the “of the accumulation of evidence that excess demand and elevated core inflation are both proving more persistent” and after taking into account its “revised outlook for economic activity and inflation.”

This decision was expected by analysts and marks the bank's 10th rate hike since starting this rate- hike cycle in March 2022 – the Bank’s pledge to continue its policy of quantitative tightening.

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To understand today’s decision and the Bank’s current thinking on inflation, interest rates and the economy, we highlight the latest observations on inflation facts, Canadian housing and economic performance and global economic performance below:

Inflation facts and outlook

  • In Canada, Consumer Price Index (CPI) inflation eased to 3.4% in May, a “substantial and welcome drop from its peak of 8.1% last summer”
  • While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from an easing of “underlying inflation”
  • With the large price increases of last year removed from the annual data, there will be less near-term “downward momentum” in CPI inflation
  • Moreover, with three-month rates of core inflation running around 3.5% to 4% since last September, “underlying price pressures appear to be more persistent than anticipated”, an outcome that is reinforced by the Bank’s business surveys, which found businesses are “still increasing their prices more frequently than normal”
  • Global inflation is easing, with lower energy prices and a decline in goods price inflation; however, robust demand and tight labour markets are causing persistent inflationary pressures in services

Canadian housing and economic performance

  • Canada’s economy has been stronger than expected, with more momentum in demand
  • Consumption growth was “surprisingly strong” at 5.8% in the first quarter
  • While the Bank expects consumer spending to slow in response to the cumulative increase in interest rates, recent retail trade and other data suggest more persistent excess demand in the economy
  • The housing market has seen some pickup
  • New construction and real estate listings are lagging demand, which is adding pressure to prices
  • In the labour market, there are signs of more availability of workers, but conditions remain tight, and wage growth has been around 4-5%
  • Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing

Global economic performance and outlook

  • Economic growth has been stronger than expected, especially in the United States, where consumer and business spending has been “surprisingly” resilient
  • After a surge in early 2023, China’s economic growth is softening, with slowing exports and ongoing weakness in its property sector Growth in the euro area is effectively stalled: while the service sector continues to grow, manufacturing is contracting
  • Global financial conditions have tightened, with bond yields up in North America and Europe as major central banks signal further interest rate increases may be needed to combat inflation
  • The Bank’s July Monetary Policy Report projects the global economy will grow by “around 2.8% this year and 2.4% in 2024, followed by 2.7% growth in 2025”

In Summary

In terms of what Canadians can expect in the near term, the Bank had this to say: “Quantitative tightening is complementing the restrictive stance of monetary policy and normalizing the Bank’s balance sheet. Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”

Stay tuned

Please circle September 6th, 2023 on your calendar as the date of the Bank’s next scheduled policy rate announcement. We will follow that decision closely with an executive summary the same day. In the meantime, Canadian Tailored Mortgage Solutions empowered Mortgage Agents are always here to help you make sense of key economic news and market trends.