Live updates: Bank of Canada raises key interest rate by 50 basis points, delivering seventh consecutive increase
The latest on the Bank of Canada’s rate decision
The Bank of Canada raised its benchmark interest rate by 50 basis points, surprising markets with another oversized rate hike and signaling that it may be nearing the end of its historic rate-hike cycle.
This moves the central bank’s policy rate to 4.25 per cent from 3.75 per cent – the first time it has topped 4 per cent since early 2008.
The Bank of Canada raised its benchmark interest rate by 50 basis points, surprising markets with another oversized rate hike while signaling that it may be nearing the end of its historic rate-hike cycle.
The Wednesday announcement lifts the policy rate to 4.25 per cent from 3.75 per cent, the highest level since early 2008. Markets were expecting a smaller 25-basis-point increase. (A basis point is one hundredth of a percentage point).
While the bank opted for another large move, it softened its language about future rate increases – a sign that its aggressive campaign against inflation may be approaching a turning point.
“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance,” the bank said in its one-page rate decision statement. In previous rate announcements, the bank had said that it expected rates “will need to rise further.”
This shift in language will inform market expectations about how much further the bank intends to go before pausing its rate hikes. Markets are pricing a “terminal rate” of 4.25 per cent. Canadian bond yields rose slightly following the announcement, and the Loonie strengthened against the U.S. dollar.
The bank has now increased interest rates seven times since March in an effort to tackle the highest inflation in decades. Higher interest rates make it more expensive for households and businesses to borrow money and service existing debts. The goal is to lower spending throughout the economy to slow the pace of price increases.
Inflation has trended down since the summer. Annual consumer price index inflation stood at 6.9 per cent in October, down from a peak of 8.1 per cent in June, and the bank noted that three-month indicators suggest that price pressures “may be losing momentum.” But inflation is still more than three times the central bank’s 2-per-cent target and people’s expectations about future inflation remain elevated.
“The tightening cycle likely has reached its zenith, but we’ll need the pain of these higher rates to persist for a while to stall economic growth and thereby cool inflation,” Canadian Imperial Bank of Commerce chief economist Avery Shenfeld wrote in a note to clients.
Heading into the decision, Bay Street Analysts were split on whether the bank would move by 25 or 50 basis points. Recent economic data has been ambiguous, sending conflicting signals about how much the economy is weakening in the face of higher interest rates.
The Bank of Canada highlighted the resilience of the economy in its rate statement, noting that GDP in the third quarter was “stronger than expected.” It said the economy continues to operate in “excess demand,” with tight labour markets and near record-low unemployment.
At the same time, the bank said that higher rates are “restraining domestic demand.” The housing market is in a deep slump, with national sales down 36 per cent year-over-year in October, and prices down 10 percent. There are also signs that consumers are tightening their belts in response to higher rates. Household spending fell 0.3 per cent in the third quarter, the first drop since the second quarter of 2021.
“We assume that the resilience of the labour market and a desire not to send too dovish a message will cause the Bank to enact one final 25-basis-point hike in January,” Stephen Brown, senior Canada economist with Capital Economics wrote in a note to clients. “But with Canadian oil prices tumbling below $50 in recent days, almost 40 per cent lower than the Bank assumed in its October Monetary Policy Report, it would not be a complete surprise if today marks the last hike in this cycle.”
Monetary-policy changes take time to work through the economy, often up to six to eight quarters. This lag opens up the risk of overtightening if the bank is not careful. Over the past month-and-a-half, Bank of Canada Governor Tiff Macklem has begun arguing that the bank needs to balance doing too little to fight inflation against the risk of doing too much and crashing the economy.
“Overall, the data since the October MPR support the Bank’s outlook that growth will essentially stall through the end of this year and the first half of next year,” the bank said. Its latest economic forecast from October shows near-zero growth for the next three quarters putting the Canadian economy right on the edge of recession.
Deputy governor Sharon Kozicki will deliver a speech on Thursday explaining the bank’s decision. The next rate decision is on January 25.