Bank of Canada Hikes Rate for Sixth Time This Year

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On October 26, the Bank of Canada continued its programme of quantitative tightening and increased its goal for the overnight lending rate by 50 basis points to 3.75%. The policy rate may also increase given the economy's ongoing demand pressures, elevated inflation and inflation expectations, and other factors.

After the announcement, the financial markets had already factored in at least another 25 to 50 basis points of interest rate increases through the third quarter of 2023.

The strength of the worldwide recovery from the pandemic, supply chain disruptions, and rising commodity prices resulting from the conflict in Ukraine are all factors that the Bank acknowledges are contributing to the continued high and widespread global inflation. As the strength of the U.S. dollar intensifies inflationary pressures in many nations, financial stress has begun to rise in several economies. The Bank anticipates a significant downturn in the global economy in 2023 as a result of tighter global monetary policy.

The demand for goods and services continues to outpace the economy's capacity to supply them, according to the Bank, which is pushing up domestic inflation. The Canadian economy continues to be characterised by excess demand and tight labour markets. Despite the fact that job openings have decreased from their peak, they are still numerous and firms continue to report significant labour shortages. Due to this as well as the surplus demand brought on by the economy's complete reopening following pandemic restrictions, prices for both products and services have significantly increased.

The Bank also noted that investment on huge purchases and housing, two sectors of the economy that are sensitive to interest rates, are beginning to be affected. The bank predicts that prices "are projected to continue to decrease, particularly in those markets that saw bigger gains during the pandemic," and that "the reduction in residential investment that began in the second quarter of the year will continue through the first half of 2023." However, the Bank believes that it will take some time for the effects of higher rates to realise. The Bank projects that the effects will stall later this year and through the first half of 2023, declining from just over 3% in 2022 to just under 1% in 2023, with a modest increase of 2% expected in 2024.

While the Consumer Price Index (CPI) inflation rate decreased in September as a result of lower gasoline prices, it is still well above the Bank's goal range and has widened as nearly two-thirds of the CPI's components have had price increases of more than 5% in the previous year. "Many Canadian families are experiencing difficulties due to stretched household budgets and increased food and housing costs." Inflation is anticipated to drop from over 7% in the fourth quarter of 2022 to around 3% in late 2023 and return to 2% by the end of 2024 as the economy adjusts to higher interest rates, heightened commodity prices, and supply chain disruptions.

The top chartered banks in Canada are now offering exceptional interest rates on five-year fixed mortgages that hover around 5.54%. Based on their creditworthiness and the extent to which they conduct additional banking business with the mortgage lender, home buyers can frequently negotiate the interest rate for mortgage financing.

The stress-test hurdle in the fixed rate & variable rate spaces is currently around 7.5% for new borrowers because the minimum qualifying rate for all mortgages is the greater of the mortgage contract rate +2% or 5.25% as set by the Office of the Superintendent of Financial Institutions & the Department of Finance. Even if the mortgage is for less than five years, all mortgage applicants must be eligible for financing based on an interest rate that is no lower than the benchmark five-year lending rate.

The Bank of Canada will next declare interest rates on December 7, 2022. On January 25, 2023, the Bank will release its next comprehensive update of its projections for the economy, inflation, and projection risks.

Source By: CREA