The Bank of Canada raised its benchmark rate by three quarters of a percentage point Wednesday to 3.25 per cent. Follow live updates below from Mark Rendell in Ottawa, columnist David Parkinson, economics reporter Matt Lundy, and real estate reporter Rachelle Younglai.
What to watch for next
OTTAWA — Senior deputy governor Carolyn Rogers will deliver a speech to Calgary Economic Development on Thursday at 11:40 a.m. explaining the thinking behind today’s decision. This will be followed by a news conference at 1 pm.
The Bank of Canada’s next rate announcement is on Oct. 26. It will also publish its quarterly monetary policy report, which lays out the central bank’s latest inflation and economic growth forecasts.
Central bankers will be paying close attention to Statistics Canada data in the coming weeks, including the August Labour Force Survey (Sept. 9), August Consumer Price Index (Sept. 20) and July gross domestic product by industry (Sept. 29).
The European Central Bank is expected to announce another oversized interest rate hike on Thursday. The U.S. Federal Reserve is expected to follow suit with another large rate hike on Sept. 21.
RBC, TD increase prime lending rate to 5.45%
RBC and TD have increased their prime lending rate to 5.45 per cent from 4.7 per cent. The other banks are expected to follow suit.
That raises the amount of interest variable-rate mortgage holders pay on their loan and will push these borrowers closer to their so-called trigger rate.
The trigger rate is the level at which the borrowers’ regular monthly payments will not be enough to cover the interest for the period. The exact trigger rate is different for every mortgage holder and depends on the size of their loan, the amount of their monthly payment, the interest rate of the mortgage and length of the amortization period.
What is your mortgage trigger rate? This calculator helps you estimate it.
Cabinet to debate whether new cost-of-living support is needed to help Canadians, Chrystia Freeland says
The federal cabinet will discuss this week whether new federal measures are needed to help Canadians with the cost of living, Finance Minister Chrystia Freeland said after the Bank of Canada announced a 0.75 per cent rate hike aimed at dampening inflation.
The Finance Minister made the comment to reporters Wednesday on her way in to a meeting of the federal cabinet in Vancouver, where ministers are holding a closed-door retreat that wraps up on Thursday.
Ms. Freeland was asked if she is ruling out new federal measures to support consumers.
“I didn’t say that,” she said. “I said that we are constantly looking. We’re going to continue to do that. I think that’s going to be a very important subject of our discussions today and tomorrow.”
Why getting back to BoC’s inflation target of 2% could take years
There are signs that headline inflation in Canada has peaked and is starting to come down. The annual rate of consumer price index (CPI) inflation dipped to 7.6 per cent in July from a four-decade high of 8.1 per cent in June, largely as a result of falling oil prices.
But getting back to the bank’s 2-per-cent inflation target could take years, and the bank used its rate statement to highlight worrying signs that domestic inflation continues to push higher.
Measures of core inflation, which strip out the more volatile CPI components such as oil and food, moved higher in July. Moreover, the labour market remains incredibly tight, with the unemployment rate at a record-low 4.9 per cent, which is pushing up wages and feeding into inflation, particularly in the service sector.
The bank won’t release its next inflation forecast until October. In July, it said that it expects inflation to ease to about 3 per cent by the end of 2023 and to return to the 2 per cent target by the end of 2024.
Bank of Canada’s hope for a ‘soft landing’ begins to narrow as high inflation persists
OTTAWA — The central bank is trying to engineer a “soft landing,” where inflation falls without a sharp economic contraction or a spike in unemployment.
Mr. Macklem said in July that he still believes this outcome is possible, although he acknowledged that the path to a soft landing has narrowed because of the persistence of high inflation. The central bank remains particularly wary that Canadians will lose faith in its 2-per-cent inflation target.
“Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched,” the bank said in the rate decision statement.
High inflation became entrenched in the 1970s and 1980s, when inflation got caught in a so-called wage-price spiral, where workers demanded higher wages and companies kept increasing prices in a self-reinforcing cycle. The bank warned in its July Monetary Policy Report that interest rates would need to move higher, and cause more economic pain, if a wage-price spiral develops.
Bank of Canada nearing the end of its rate hike cycle, forecasters predict
OTTAWA — Financial markets and private-sector forecasters believe that the central bank is nearing the end-point, or “terminal rate,” of its tightening cycle. But the bank gave little indication in Wednesday’s statement-only decision of how much further it intends to go.
“Big picture, the bank is maintaining optionality here,” Andrew Kelvin, Toronto Dominion Bank’s chief Canada strategist, wrote in a note to clients. “The Bank is falling back on data dependence with no additional guidance, which suggests to us that the bank is itself uncertain about the endpoint for the overnight rate this tightening cycle.”
Mr. Macklem said in July that the bank intended to get the policy rate slightly above the “neutral range” of 2 per cent to 3 per cent. Further rate hikes would depend on incoming economic data, he said.
Most private-sector economists expect another quarter-point or half-point rate hike at the bank’s Oct. 26 rate decision, and a terminal rate of between 3.5 per cent and 4 per cent.
Central banks around the world are making up for misjudging inflation
OTTAWA — The Bank of Canada is not alone in its aggressive pivot away from low interest rates. The U.S. Federal Reserve has raised rates four times this year and forecasters expect it to announce another oversized move later this month. The European Central Bank is widely expected to unveil a 75-basis-point rate hike on Thursday.
Central banks around the world were slow to start tightening monetary policy last year and early this year, despite signs that high inflation was not a transitory phenomenon. Many have tried to make up for this mistake over the past six months by adopting an increasingly hawkish approach to inflation fighting.
At a late-August meeting of central bankers in Jackson Hole, Wyo., Fed chair Jerome Powell said fighting inflation will likely require “a sustained period of below-trend growth.”
”While higher interest rates, slower growth and softer labour-market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain,” Mr. Powell said.
Homeowners to see higher costs, would-be buyers face tougher test to qualify for mortgages
After today’s rate hike, borrowers will soon pay more in interest. It’s just a matter of when. Those with a variable rate mortgage where the monthly payments remain the same, will see a higher share of their monthly payment go toward interest. Fixed-rate mortgage holders will pay a higher monthly amount when they renew their mortgage.
It will continue to be harder for would-be buyers to qualify for a mortgage and they will qualify for less. “Borrowing power is going to be reduced once again,” said Don Scott, chief executive with mortgage brokerage, Frank Mortgage.
Today’s interest rate hike will also make the mortgage stress test harder. Under federal bank rules, borrowers must prove they can make their monthly mortgage payments at an interest rate that is at least 2 percentage points higher than their actual mortgage rate.
According to Mr. Scott, the cheapest variable-rate mortgages may soon be 4.35 per cent and the lowest five-year fixed mortgage rate will top 5 per cent. That means, borrowers will have to prove they can cover their payments with an interest rate at 6.35 per cent and 7 per cent, respectively.
And this in turn means would-be homebuyers will not be able to spend as much on a home. It will be particularly hard for first-time homebuyers, said Laura Martin, chief operating officer of mortgage brokerage Matrix Mortgage Global. Ms. Martin said repeat buyers have benefited “massively” from the run-up in prices over the past four years and will be able to use their equity from any sale to help with another purchase.
11:20 a.m. ET
Canada’s housing market to continue its slump with latest rate hike
For anyone who thought Canada’s housing market had bottomed over summer, the central bank’s forward guidance has put that thought to rest. The bank’s governing council said it “still judges that the policy interest rate will need to rise further.”
And that means today’s interest rate hike is not the last. Borrowing will continue to become more expensive and Canada’s housing market slump will continue to deepen.
Royal Bank of Canada’s assistant chief economist, Robert Hogue, said higher interest rates will “keep chilling markets in the months ahead.” “We see the downturn intensifying and spreading as buyers take a wait-and-see approach while ascertaining the impact of higher lending rates,” he said in a research note.
Bank of Montreal chief economist Douglas Porter said the central bank’s forward guidance solidified his view that the national home price index could drop 20 per cent from peak pricing in the spring.
So far this year, home prices have dropped the most since the global financial crisis in 2009. Nationally, the home price index is down 6 per cent from February. In the Toronto region, the home price index has declined nearly 16 per cent from March to August, with some of the city’s suburbs losing more than 20 per cent.
David Parkinson: BoC signals it isn’t convinced by slowing economic growth, intends to push rates higher
If you think about what the Bank of Canada is trying to achieve, and how it thinks about interest-rate levels in terms of their net economic effect, it shouldn’t be surprising that it’s still talking about the need to take rates higher.
The bank wants to slow domestic demand that it continues to say is overheated relative to supply, in order to ease the most persistent and problematic inflation pressures that threaten to hang around even as prices for gasoline and other commodities ease. But the increase to 3.25 per cent announced today barely inches the bank into what it considers restrictive levels – at which interest rates are considered high enough to restrain economic activity.
The bank has estimated that “neutral” rates – those which neither stimulate nor restrain the economy – are between 2 and 3 per cent. So, even with all the rate increases earlier this year, the rate of 2.5 per cent prior to today’s hike merely achieved the mid-point of this neutral zone. All the bank had done was remove the stimulus that it had put in place at the beginning of the COVID-19 crisis, to stop actually stoking the economy (and, by extension, inflation) with its interest rates. It signalled as far back as June that achieving neutral levels was only an intermediate step; higher rates would be needed to actually cool the overheated demand in the economy and bring it back into balance with supply.
But if 3 per cent is the top end of “neutral”, 3.25 per cent is the minimum rate that can be considered restrictive. With inflation running at 7.6 per cent in July – more than triple the bank’s target of 2 per cent – and the bank’s core inflation measures averaging 5.3 per cent, this does not feel like a situation in which the bare minimum will do the trick. The bank appears to share that view.
How much higher will it go? That’s the open question. It depends greatly on how the Bank of Canada interprets the economic data from here, as those numbers will tell it what effect the rate increases are having.
And at least so far, the bank is signalling that it isn’t nearly convinced by the slowing pace of economic growth, the weaker-than-forecast second quarter GDP numbers and the recent dips in employment. It went into some detail to emphasize that domestic demand was “very strong” within those disappointing second-quarter GDP data. It notably ignored the June and July employment declines, saying only that “labour markets remain tight.”
The message: the bank needs to see more, and it’s poised to push rates even higher to get the job done. But now that it’s in restrictive territory, it may be willing to slow or pause the pace while it gives monetary policy some time to do its job.
Rob Carrick: Eight dos and don’ts for surviving today’s rising rate world
On the occasion of the Bank of Canada raising its overnight rate for a fifth time in 2022, here are some dos and don’ts for surviving and profiting in today’s rising rate world.
Do: Stop thinking about good and bad debt
Homebuyers, no more making excuses for high mortgage payments because you’re building home equity. Rising equity doesn’t pay for groceries or gas up your vehicle. Anyway, house prices are falling right now because borrowing costs are rising. The new rule of borrowing: When interest rates are streaking higher, all debt is a problem.
Don’t: Let things slide
If you’re struggling to keep up with your debts in these early innings, consider visiting a non-profit credit counselling service to discuss your options. For some help in shoring up your finances for now and the future, try a financial planner who charges an hourly or flat rate. Don’t be afraid to explain what services you want from a planner and then ask the cost.
Read the rest of Rob Carrick’s dos and don’ts here.
Economists weigh in on the BoC’s rate hike
Here is how some prominent economists reacted to the Bank of Canada’s latest rate hike.
Avery Shenfeld, chief economist at CIBC Capital Markets: “For those asking ‘are we there yet?’, the Bank of Canada answered ‘not yet’ signalling that today’s outsized rate hike still leaves rates shy of where it believes they will need to be to quell inflation. … The Bank is likely to want to leave the door open to go beyond 3.5 per cent until it gets more definitive evidence of a deceleration in growth and inflation pressures.”
Royce Mendes, head of macro strategy at Desjardins Securities: “The recent decline in commodity prices and the underperformance of GDP growth relative to their forecasts didn’t make much impact on the Bank of Canada’s decision. Governing Council chose to highlight that inflation and inflation expectations remain high and that domestic demand in the Canadian economy continued to show strong momentum in Q2. Even on the housing front, the statement only mentioned that the recent pullback, which has been sharp, was to be expected. … We had previously penciled in another 25 [basis point] rate hike for October, but now see the possibility for more. That being said, given the amount of debt outstanding and Canada’s reliance on housing to drive the economy, pushing rates above 4 per cent still seems like a high hurdle to pass.”
James Orlando, senior economist at Toronto-Dominion Bank: “The Bank has placed focus on the near-term data instead of the likely path of the economy. Given the lags of past interest rate hikes on inflation, we expect the BoC to hike the policy rate to 4.0 per cent by year-end. This implies even more [economic] growth sacrifice as the BoC attempts to achieve its goal of price stability.”
BoC says Canada’s GDP was weaker than expected, economy should moderate in second half of 2022
OTTAWA — Interest rate-sensitive parts of the economy have taken a drubbing, with real estate prices and home sales volumes falling sharply from their peaks earlier this year.
The bank acknowledged this in its rate statement, but noted that the Canadian economy continues to be in a position of “excess demand.”
“Canada’s GDP grew by 3.3 per cent in the second quarter. While this was somewhat weaker than the bank had projected, indicators of domestic demand were very strong – consumption grew by about 9.5 per cent and business investment was up by close to 12 per cent,” the bank said.”
“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 added.
The Globe’s economics columnist, David Parkinson, on today’s rate hike decision
The bank did precisely what economists anticipated, and didn’t say much here that we didn’t already know. But there are some intriguing tweaks to the language in the conclusion – which is typically the critical paragraph in these announcements.
It dropped the emphasis from the previous July announcement of the economy being “clearly in excess demand,” perhaps a nod to signs of slowing growth and employment. It still says rates need to rise further, but removed the statement that “the pace of the increase will be guided by the Bank’s ongoing assessment of the economy and inflation.”
Instead, it’s now talking about assessing how much higher rates need to go “as the effects of tighter monetary policy work through the economy.”
What does that add up to? Possibly, now that the BoC has reached 3.25 per cent, it’s thinking about taking a pause to let this series of large and rapid rate hikes work their way further into the economy.
That pause could come as soon as the next rate decision in October. More likely, since the bank asserts that rates must still rise further, we’ll have one more increase (probably a smaller one) in October, before the bank takes a break and lets its policy moves play out for a while.
Bank of Canada’s rate hike moves policy into ‘restrictive territory’
OTTAWA — The September announcement pushes Canadian monetary policy into “restrictive territory,” where borrowing costs weigh on economic growth, for the first time in about 20 years. It’s another major step in the fastest rate hike cycle in decades, which has seen the bank shift from near-zero interest rates to restrictive monetary policy in a little more than six months.
Bank of Canada delivers 0.75 percentage point rate hike
The Bank of Canada raised its overnight interest rate by 75 basis points to 3.25 per cent on Wednesday, its fifth consecutive hike in its campaign to regain control over inflation.
The bank said effects of COVID-19 outbreaks, supply chain disruptions, and the war in Ukraine continued to dampen economic growth in Canada and boost prices.
The bank also noted its governing council believes that further interest rate hikes will be necessary due to expectations that inflation will continue to be higher than its 2 per cent target.
– Globe staff
Bank of Canada expected to announce another oversized rate hike, pushing borrowing costs into ‘restrictive territory’
OTTAWA — The Bank of Canada is expected to announce another oversized interest rate hike this morning, its fifth consecutive move in a forceful campaign to regain control over inflation. The announcement will be at 10 a.m.
Bay Street forecasters and financial markets expect the central bank to raise its overnight rate by 75 basis points. (There are 100 basis points in a percentage point.) That would lift the benchmark rate to 3.25 per cent and push monetary policy into “restrictive territory,” where borrowing costs act as a drag on the overall economy.
A smaller, 50-basis-point hike and a larger, 100-basis-point move are also possible, some economists say.
Governor Tiff Macklem and his team are intentionally trying to slow down the economy to prevent high inflation from becoming entrenched. They’ve raised rates four times since March, including a full percentage-point increase at the bank’s last rate decision in July, the largest single move since 1998.
Investors will be parsing today’s statement-only announcement for signs about how close the Bank of Canada is to the end of its tightening cycle, and whether the bank intends to slow its pace of rate increases.
Higher rates make it more expensive for individuals and businesses to borrow money. That’s already taking a bite out of the economy. Home sales and prices have fallen sharply from their peak earlier this year, and preliminary data suggests the country’s gross domestic product contracted in July.
Mr. Macklem said in July that he believes a “soft landing,” in which inflation comes down without a spike in unemployment or a significant economic contraction, is still possible. But he acknowledged that the path to a soft landing has narrowed and signalled that the bank is willing to cause economic pain to get inflation under control.