Bank of Canada Posts Largest Rate Increase in More than 20 years

The Bank of Canada continued its stated goal of monetary tightening, raising the target overnight rate by 0.5% to 1%. The Bank rate now stands at 1.25% and the deposit rate going forward will be set at 1%.

Traditionally, the Bank of Canada moves interest rates slowly, a quarter point at a time, but it appears the Bank viewed February’s headline Consumer Price Index (CPI) reading of 5.7%, the second consecutive month where headline inflation exceeded 5%, as a call to action.

In addition to the rate increases, the Bank confirmed it will begin slowly shrinking the size of its balance sheet. As of April 25, 2022, it will no longer replace maturing Government of Canada bonds.

Furthermore, the Bank revised its growth projection for Canada upward by a quarter point to 4.25% for 2022 and down by a quarter point to 3% for 2023 from the January Monetary Policy Report estimates.

Going down the list, rising prices for oil, natural gas, and other commodities, the BA.2 Omicron COVID-19 variant contributing to manufacturing and shipping backlogs, the ongoing conflict in the Ukraine, the continued correction in the property sector in China, and higher than anticipated inflation rates in the United States (that will likely result in less accommodative monetary policy than previously expected) are all factors impacting previous global growth projections and are directly contributing to the rate of inflation worldwide.

Closer to home, the Bank of Canada stated growth in the first quarter of 2022 was stronger than expected and as a result, Canada’s unemployment rate dropped to 5.3% in March, the lowest level on record since Statistics Canada started tracking this metric in 1976. Ontario and Quebec both posted some of the highest employment gains on record maintaining upward pressure on wages, further tightening already extremely tight job markets.

With estimates that the inflation rate may peak at or above 6%, well above the Bank’s target rate of 2%, the clear objective moving forward will be price stabilization while creating conditions that support maximum sustainable employment.

The consensus is that the Bank will continue to raise interest rates through the remainder of 2022 in an attempt to bring the rate of inflation closer to its stated target range of 1%-3%. Markets currently anticipate rates could potentially rise as much as a point and a half to 2.5% by the end of the year. This is a full point higher than market watchers expected only a month ago.

Canada’s major chartered banks are currently advertising five-year fixed mortgage special interest rates of around 3.79%. Home buyers can often negotiate the interest rate for mortgage financing based on their creditworthiness and the degree to which they do other banking business with the mortgage lender.

The Bank of Canada’s next scheduled interest rate announcement will be on Wednesday June 1, 2022.

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