The Bank of Canada has delivered a .75% increase to its overnight prime rate, taking it to 3.25%, the highest among major advanced economies and the highest in Canada since 2008..In a statement, the bank said, “The global and Canadian economies are evolving broadly in line with the bank’s July projection. The effects of COVID-19 outbreaks, ongoing supply disruptions and the war in Ukraine continue to dampen growth and boost prices.”.The move is in line with those of many other national central banks’ efforts to tighten monetary policy..Economic activity in the US has moderated, although the US labour market remains tight. China is facing ongoing challenges from COVID shutdowns. Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen..“In Canada, CPI inflation eased in July to 7.6% from 8.1% because of a drop in gasoline prices. However, inflation excluding gasoline increased and data indicate a further broadening of price pressures, particularly in services,” said the bank. “The bank’s core measures of inflation continued to move up, ranging from 5% to 5.5% in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.”.The .75% increase met the expectations of 31 economists surveyed by Bloomberg, all of whom predicted an increase of at least .5%..All six of Canada’s major commercial lenders favoured a move of no less than .5%, along with Goldman Sachs and JP Morgan. UBS and Moody’s are among the handful that expected a half-percentage-point hike..There are two more rate announcements scheduled for 2022, on Oct.26 and Dec. 7..Prior to those announcements, market watchers will be looking for clues from the inflation rate, commodity price increases or decreases and home sales and prices on whether more will be coming in October, amid speculation the hiking cycle is at or near its end..In the spring the bank said it would take the rate to at least 3.25%, or possibly 3.5%, depending on circumstances..Nathan Janzen and Claire Fan, economists with the Royal Bank of Canada, feel housing markets will play a role in any decisions from the bank..“A further softening in household demand is still required to bring inflation back to the bank’s 2% target rate,” said the economists in a Sept. 2 report to investors. “But if household demand and inflation pressures wane as expected, the bank could be in a position to halt its tightening cycle soon.”.Since that report, statistics have been released showing the Toronto and Vancouver housing markets defied expectations of a massive slowdowns, with the Toronto area actually showing a sales increase in August from July..However, Bloomberg Economics says the bank isn’t done..“Activity is moderating, particularly in rate-sensitive housing, where Canada ranks unfavorably on our bubble metrics,” says Bloomberg economist Andrew Husby. “Still, that won’t outweigh the fact that inflation is too high for comfort ahead of potential supply disruptions emanating from Europe or China this winter.”.“The Bank of Canada’s focus on core inflation leads us to expect hikes of .5% in October and .25% in December.”.Others, including Canadian Imperial Bank of Commerce executive director and senior economist Karyne Charbonneau, believe the policy rate is likely to peak at 3.25%..“We don’t think there’s space for this type of hike [one percentage point] anymore,” Charbonneau said in July. “So probably 0.75% in September, and then take a break.”.“We think that by then, the economy will be slowing significantly on these higher interest rates and still-high inflation.”.The bank is going far beyond sending out clues about its next move.."With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic. The bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply,” it said in its statement..“Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target.” .“The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.”
