Bank of Canada Holds Rates for the First Time Since March 2022

The Bank of Canada (BOC) has announced that the overnight rate will remain unchanged. This marks the first time the overnight rate has not changed since March 2022. The overnight rate is the rate at which banks borrow money on the overnight market, and changes to this rate have an impact on banks’ prime rate pricing, which is the rate at which lenders will lend money to consumers. The current prime rate stands at 6.70%, the highest it has been since 2001. This comes after a year of the BOC aggressively raising the overnight rate by 4% in an attempt to control inflation.

What Went Behind This Rate Pause?

In the latest monetary policy report, the BOC indicated that it expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases, provided that economic developments evolve broadly in line with the report outlook. This pause in the rate cycle does not mean that the BOC is done increasing rates, but rather that they are more data-driven in their decision-making process.

Recent GDP news also played a role in the decision, as growth in the Canadian economy decelerated for a second straight quarter, edging up just 0.2% in the fourth quarter of 2022, the slowest pace of growth since the second quarter of 2021. While inflation has started to come down, it is still high, with the CPI at 5.9%, above the target range of 1-3%.

Looking at the Data

The BOC is keeping a close eye on several factors that could impact inflation, such as population growth and the unemployment rate. The Canadian population grew by 0.9% between July and October 2022, largely due to an increase in non-permanent residents. While population growth can have advantages, such as an increased labor force and more goods and services being produced, it can also drive costs up when there is a shortage in supply, particularly in the housing market.

The unemployment rate remains stubbornly low at 5%, just shy of the record-low observed in June and July 2022. While low unemployment rates mean more Canadians are working, it can put upward pressure on inflation because Canadians have more spending money, leading to higher demand.

In the last rate hike announcement, the Bank of Canada stated:

“Overall, the latest data remains in line with the Bank’s expectation that CPI inflation will come down to around 3% in the middle of this year”

– Bank of Canada

So, the Bank of Canada is predicting that inflation will come back down to the 3% level mid this year which would be a great thing if it did happen but it’s just predictions.

It is important to keep monitoring economic developments to gain insight into future policy decisions.

Should you have any questions or concerns, please feel free to contact us at 519-250-4848, and one of our mortgage advisors will be happy to assist you.

Sincerely, Rasha Ingratta

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