The Bank of Canada has once again raised its overnight rate, pushing it to a 22-year high of 4.75%, marking a pivotal moment in the country’s financial history. This move is the latest in a series of rate increases that began in March 2022 and has resulted in the fastest tightening cycle in the bank’s history. Analysts and markets are already anticipating further hikes in the coming months, with a high likelihood of another increase in July1.
To fully understand the implications of these decisions, let’s take a step back and review the bank’s rate-setting journey since the 2008 financial crisis.
In October 2018, the key interest rate reached 1.75%, a gradual increase following the 2015 oil price crash. However, the advent of the COVID-19 pandemic in March 2020 saw a shift in this trajectory. The bank initially lowered its overnight rate target to 1.25%, and by March 27, it had further reduced its key interest rate to a record low of 0.25% in an attempt to stimulate the economy. This period also marked the implementation of a quantitative easing program.
With the economy showing signs of recovery and COVID-19 restrictions lifting, the Bank of Canada announced the end of its quantitative easing program in October 2021. The real turning point, however, was March 2022, when the bank raised its key interest rate to 0.50% amid persistently high inflation. This marked the beginning of a series of significant hikes, leading to the current rate of 4.75%2.
The most recent hike is primarily a response to robust economic performance and stubbornly high inflation. In the first quarter of 2023, Canada’s GDP growth was a stronger-than-expected 3.1%, with broad-based consumption growth. The labour market remains tight, with increased immigration and participation rates expanding the supply of workers but new workers being quickly hired. The Bank of Canada also noted strong demand and high prices for a wide range of goods and services. Despite expectations of easing to around 3% in the summer, concerns have been raised that CPI inflation could settle materially above the 2% target3.
The potential consequences of these continuous rate hikes are multifaceted. For the average Canadian, higher interest rates could mean increased borrowing costs, including mortgages and personal loans. This could lead to reduced consumer spending, potentially slowing the economy. On the other hand, savers might benefit from higher returns on interest-bearing accounts.
As for the Canadian economy, while the rate hikes are intended to combat inflation and cool the overheating economy, they could potentially slow economic growth. However, the Bank of Canada remains committed to restoring price stability and will continue to assess economic indicators to ensure they align with achieving the inflation target3.
In the global context, major central banks have signalled that interest rates may have to rise further to restore price stability. The United States is seeing economic slowing, but consumer spending remains resilient. Europe is experiencing stalled economic growth, and China is expected to slow after a first-quarter surge3.
As Canada and the world navigate this complex economic landscape, the path ahead remains uncertain. Future decisions by the Bank of Canada and other central banks will be critical in shaping the economic recovery from the COVID-19 pandemic and beyond.
Please note that this article provides a broad overview and may not cover all aspects of the potential economic consequences of the Bank of Canada’s rate hikes. For personalized financial advice, it’s always best to consult with a financial advisor or economist.
Sources
This article was compiled using information from the following sources:
- Reuters: “Bank of Canada hikes rates to a 22-year high, more increases expected”
- CTV News: “Timeline of interest rate increases in Canada”
- Bank of Canada: “Bank of Canada raises policy rate 25 basis points, continues quantitative tightening”
Please note that these sources provide a rich source of information for readers interested in gaining a more detailed understanding of the topic.
