The latest on the Bank of Canada's rate decision
The Bank of Canada has increased its benchmark interest rate by a quarter point and pushed out its timeline for getting inflation under control. This lifts the bank's policy rate to 5 per cent, a level last seen in April, 2001.
The bank now expects inflation to remain at about 3 per cent for the next year before declining to the bank's 2-per-cent target by the middle of 2025.
Find updates from our reporters and columnists below.
- Things will be quiet at the Bank of Canada over the summer, with the next interest rate decision not scheduled until Sept. 6.
- Statistics Canada will publish June inflation numbers on July 18.
- The U.S. Federal Reserve will deliver its next interest rate decision on July 26. After holding rates steady in June, the Fed is widely expected to hike again later this month. The so-called “dot plot,” which captures Federal Open Market Committee members’ expectations for monetary policy, shows two more rate hikes this year.
Economists react to today’s BoC rate announcement
Here is how economists on Bay Street reacted to the latest Bank of Canada rate hike:
Royce Mendes, head of macro strategy at Desjardins Securities: “In the statement accompanying the rate decision, the Bank of Canada wasn’t willing to provide any guidance about what comes next. The text simply said that Governing Council will continue to evaluate the need for further rate increases based on incoming data. We see this as the peak for rates in this cycle. Today’s U.S. inflation data provides evidence that global inflationary pressures are dissipating.”
Stephen Brown, deputy chief North America economist at Capital Economics: “The Bank of Canada’s 25 [basis point] hike today, taking the policy rate to 5.0%, is likely to be the last in this cycle. With the labour market loosening, core inflation declining and the survey indicators implying that inflation expectations are normalizing, we expect the bank’s next move to be a rate cut – albeit not until 2024.”
Andrew Grantham, senior economist at CIBC Capital Markets: “The 25 [basis point] rise in the overnight rate to 5.0% was broadly expected by the consensus and financial markets, and a continued hawkish tone within today’s statement suggests that risks are skewed towards another hike after the summer.”
Quotes from Tiff Macklem’s BoC news conference
From his opening statement: “If we don’t do enough now, we will likely have to do even more later. If we do too much, we risk making economic conditions unnecessarily painful for everybody.”
On the economy: “We’ve seen an accumulation of evidence pretty consistent across a range of indicators that there’s more excess demand in the economy. Excess demand is proving more persistent, underlying inflationary pressures are proving more persistent.”
On inflationary pressures: “We know that the full effects of the passing interest rate increases we’ve already done have not fed through. We will be seeing that impact going forward. The other thing we’re seeing, though, in the economy is that those underlying inflationary pressures, they are stronger than we expected.”
On moving forward: “We are concerned that if we’re not careful, the progress to price stability could stall, and if you get some upward surprises from there, inflation could even move back up.”
On why the Governing Council raised the rate today rather than waiting to see more data: “I think it was a clear consensus that we didn’t see a big benefit of waiting.”
On the likelihood of a recession: “We need a period of growth, below trend, below potential, to let supply catch up with demand. That’s what’s going to relieve those price pressures, but we do think that there’s a path back to price stability with the economy still growing.”
On whether high immigration is inflationary or disinflationary in the near term: “On net, it’s probably roughly neutral, but it’s affecting different parts of the economy differently.”
On interest rates and the housing market: “We have been surprised, actually, that housing has started to bounce back as quickly as it has. And that’s one element, of many, where you’ve seen more persistence in demand in the economy than we expected.”
On continuing to push for getting inflation back to 2 per cent target: “If you don’t get inflation back to two (per cent), and you’re around three, and then you get an upward surprise, well, now you’re back to four.”
Macklem says immigration adds to both ‘demand and supply’ in the economy
High levels of immigration are adding to both supply and demand in the economy, and the effect on inflation is “probably roughly neutral,” Tiff Macklem said.
“The immigration adds supply, it adds new workers... That’s adding to supply and that is easing some of the labour shortages,” Mr. Macklem said.
“On the other hand, these new immigrants, these new entrants in the economy, they are also new consumers, they’re new renters, they’re new homebuyers, so it’s also adding to demand.“
“It’s hard to know exactly what the net effect is,” he added. “But I think the main message is that it’s adding to both demand and supply. If you start in an economy with excess demand, you add both demand and supply, you’re still in excess demand.”
Macklem: Does the Bank of Canada expect a recession?
The Bank of Canada is not expecting a recession, despite its continued push to increase interest rates.
“We still think that the increases in interest rates are feeding through to the economy. We still think growth will slow,” Mr. Macklem said.
But he added “there is a path back to price stability while maintaining growth. So there is no recession.”
The bank raised its economic growth forecast for 2023 to 1.8 per cent from a previous forecast of 1.4 per cent. It expects GDP growth to slow to around 1 per cent in the second half of this year and first half of next year.
Macklem: Where does the BoC stand on interest rate cuts?
“It’s clearly too early to be talking about interest rate cuts,” Mr. Macklem said.
Macklem says he’s prepared to raise interest rates again, if needed
Bank of Canada Governor Tiff Macklem said he’s prepared to raise interest rates again if needed to get inflation under control.
“We are trying to balance the risks of over- and under-tightening,” Mr. Macklem told reporters at a news conference after announcing the central bank’s quarter-point rate increase.
“If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to,” he said.
The bank raised the benchmark rate to 5 per cent Wednesday in response to stronger-than-expected economic growth and stubborn inflation.
Mr. Macklem said the bank considered holding rates steady but opted to act now.
“These decisions are difficult, and we did discuss the possibility of holding rates unchanged and gathering more information to confirm the need to raise the policy rate. On balance, our assessment was that the cost of delaying action was larger than the benefit of waiting,” he said.
“With the downward momentum in inflation waning and or forecast suggesting inflation will be around 3 per cent for the next year, we are concerned that the progress to price stability could stall and inflation could even rise again if there are upside surprises.”
What the BoC decision means for Canada’s housing market
Today’s Bank of Canada interest rate hike will give homebuyers more pause, especially after the bank gave no indication that this would be the last increase for a while.
Buyers were starting to become more cautious after the June increase, according to realtors and mortgage brokers. And in Toronto, the country’s largest real estate market, activity had started to slow, with sales down from May to June.
“It is making the consumer more cautious about the future and the future potential increases,” said Debbie Penzo, a realtor who has sold homes in Toronto for more than 30 years.
For borrowers, the pressure is back on.
Those with variable-rate mortgages will immediately pay more to service their loans, as their interest rates move in tandem with the Bank of Canada’s benchmark rate.Variable-rate borrowers who have fixed monthly payments will see even more of their payment go toward interest and less toward principal reduction.
Amortization periods – the length of time it takes to pay off the loan – will lengthen further. (For variable-rate borrowers, amortization periods automatically extend when interest rates rise, in order to keep their monthly payments stable. The amortizations snap back to the original length when the loans come up for renewal, and that will result in much higher monthly payments.)
In many cases, these borrowers have likely already reached the point where their monthly payment no longer covers any of the principal, according to a Bank of Canada staff analysis released last year.
At that point, borrowers will either have to make a lump sum payment or increase their monthly payments to try to get back on track with their original amortization period.
Mortgage brokers say they expect the higher interest rate to create more problems for financially stressed borrowers. Nicolle Williams said the June rate hike had forced some of her clients to seek loans from alternate lenders, which charge higher interest rates than the banks.
When variable-rate borrowers reach the point where their monthly payment no longer covers all the interest due, the unpaid interest is added to their principal and the size of their loan grows. That is known as a negative amortization, and three of the big Canadian banks allow this to occur up to a certain threshold.
Borrowers with a fixed-rate mortgage will not immediately see a change, as their loan’s interest rate remains the same over the course of their mortgage term. But for those renewing this year, the mortgage rate will be about 50-per-cent higher if they had a five-year fixed mortgage. The average five-year fixed rate is 5.69 per cent today compared with 3.49 per cent in 2018, according to MortgageLogic.news.
Read what else today’s BoC decision means for variable-rate mortgage borrowers.
Canadian dollars strengthens after BoC rate hike
The Canadian dollar strengthened to 1.3157 versus the U.S. dollar after the rate hike, up 0.6% on the day.
Analysis: Takeaways from the BoC rate decision and quarterly Monetary Policy Report
The Bank of Canada’s statement accompanying its interest-rate decision is very much a glass-half-empty document. The bank has certainly put a negative spin on pretty much every key piece of economic data that has come out since its June rate increase. Reading this statement, it’s hard to see much optimism.
This doesn’t sound to me like a bank that has finished raising interest rates. At the very least, it’s keeping its options wide open to push rates higher in order to quash inflation and the “excess demand” that it describes as “more persistent” than it had expected.
(It’s no accident that the word “persistent” appears in the rate announcement four times.)
Critically, the bank’s new economic forecasts (touched on in the rate announcement and detailed in the accompanying quarterly Monetary Policy Report) now project that inflation won’t retreat to the bank’s 2-per-cent target until “the middle of 2025.” That’s about six months later than the bank had previously forecast. That alone signals its case for higher rates and a longer wait until the bank starts cutting.
The bank does acknowledge that the economy is now growing slower than the pace of potential growth (i.e., the increase in the economy’s capacity to produce goods and services). So, the amount of excess demand has shrunk over the past quarter. Which means that the declines we have seen in the inflation rate over the past few months aren’t strictly due to favourable comparisons with the steep commodity prices of a year ago but reflect actual easing pressures. And based on the bank’s forecasts for economic growth, the gap between demand and supply should continue to shrink.
Unfortunately, it won’t disappear nearly as fast as the bank would like or had previously expected. The bank now forecasts that supply and demand won’t come into balance until early 2024 – about nine months later than its previous projection. That’s a big reassessment.
Notably, the bank itself does allow that there is “a considerable amount of uncertainty” around its forecasts. But if they prove reasonably accurate, about the only thing that changes the math on that excess-supply equation – i.e., close the gap faster – would be higher rates than the bank had previously envisioned. It certainly implies that rates will need to remain high for longer.
We should get some more clarity on these matters in the bank’s news conference at 11 a.m. ET. Governor Tiff Macklem and his senior deputy governor, Carolyn Rogers, will give the press about 45 minutes to expand on the thinking behind the rate decision, the implications of the new economic forecasts and the direction of policy from here.
How markets are reacting to the BoC interest rate decision
Domestic bond markets were clearly prepared for the Bank of Canada rate hike Wednesday, as yields headed lower, not higher, after the news.
Domestic bond yields were tracking U.S. yields lower overnight ahead of the announcement. The two-year yield fell from 4.8 per cent to 4.71 per cent by 10 a.m. and then proceeded lower, to 4.67 per cent, by 10:15.
The pattern for the five-year bond was similar, dropping from 3.94 per cent to 3.87 per cent overnight and then slightly lower to 3.83 per cent after the hike.
All told, looks like business as usual in Canadian fixed income today.
Bank of Canada raises key interest rate to 5 per cent
The Bank of Canada has increased its benchmark interest rate to 5 per cent and pushed out the timeline for getting consumer prices under control, warning that the downward momentum of inflation could stall over the next year as the economy proves surprisingly resilient to higher borrowing costs.
The quarter-point increase, which was widely expected by analysts, brings the policy rate to a level last seen in April, 2001. This will further squeeze Canadians’ finances and push up costs for mortgage holders.
In an updated forecast, the central bank said it expects the annual rate of inflation to remain around 3 per cent for the next year, declining to the bank’s 2-per-cent target by the middle of 2025.
“This is a slower return to target than was forecast in the January and April projections,” the bank said in its rate announcement. “Governing council remains concerned that progress towards the 2-per-cent target could stall, jeopardizing the return to price stability.”
The bank gave no hints about future rate decisions but left the door open to further hikes, saying it “will continue to assess the dynamics of core inflation and the outlook for CPI inflation.”
Read the full story on today’s BoC rate announcement.
Analysis: What to look for during today’s BoC decision
Whether the Bank of Canada decides to raise its key rate by another quarter point or opts to hold steady, it will have plenty of explaining to do.
Many key economic pressures have eased since the June rate decision (inflation, GDP growth, wage growth, consumer and business expectations), but one big one, employment, rebounded last month. Regardless of which way the bank’s governing council leans in its decision, a crucial element of the statement accompanying the decision will be how it frames that data. That will tell us a lot about what the bank is focusing on in interpreting the state of the economy and, critically, how it views the evolution of inflationary pressures.
The pivotal content in that statement (or, perhaps, absent from it) will be two sentences that appeared near the bottom of the June announcement: “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2 per cent target” and “Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation.” Any changes in this language will provide a strong indication of where the bank is headed next – specifically, whether it believes it is done raising rates.
Perhaps even more important will be indications of when the bank might start easing rates, as the economy slows and inflation eventually returns to something approaching that 2-per-cent target. For this, I’ll turn my attention to the new economic forecasts in the quarterly Monetary Policy Report accompanying the rate decision. In the April MPR, the bank said it expected inflation to return to 2 per cent “at the end of 2024.” Should this projection change, it would imply that the timing of the first rate cuts would move with it.
Canada’s bank regulator mulls changes to ensure banks can absorb mortgage risks
Canada’s bank regulator, the Office of the Superintendent of Financial Institutions, is considering changes that it says would help banks and mortgage insurers deal with the risks posed by mortgage borrowers who are under financial stress as a result of higher interest rates.
A proposal unveiled Tuesday afternoon by OSFI would require banks to hold more capital if their borrowers’ mortgages are negatively amortizing, meaning the borrowers’ payments are not covering all the interest they owe.
The past year’s sharp increase in the Bank of Canada’s key interest rate, from 0.25 per cent to 4.75 per cent, has wreaked havoc on borrowers and lenders, who had been operating in an environment of low and relatively stable interest rates for more than a decade.
Every time the Bank of Canada has increased its benchmark interest rate, borrowers with variable-rate mortgages have had to pay more interest. Variable-rate borrowers with fixed monthly payments – whose amortization periods automatically extend when interest rates rise, in order to keep their monthly payments stable – have seen the lengths of their loans soar above 30 years.
Read more about the OSFI proposal.
Market expectations ahead of today’s Bank of Canada decision
Canadian investors will get the Bank of Canada’s rate decision at 10 a.m. ET, with markets pricing in about a 70-per-cent chance of another increase.
Wall Street brokerages J.P.Morgan and Citigroup both expect a quarter-percentage-point rate increase today bringing the bank’s key rate to 5 per cent, but Bank of America said in a report that it expects the central bank to hold steady.
“We expect the Bank of Canada to again raise rates by 25 basis points on Wednesday, although risks around a hike or a pause are somewhat more balanced than in June,” Citi economist Veronica Clark said in a note.
“Most, but not all, data received in the weeks since the June decision have pointed towards another hike as warranted, with forecasts in the July monetary policy report likely to show upward revisions to both growth and inflation.”
Bank of Canada expected to raise interest rate despite mixed economic signals
The Bank of Canada jolted markets in June by increasing interest rates for the first time in five months. Most analysts think it will keep ratcheting up borrowing costs today, even as inflation continues to decline and economic signals have become more mixed.
Until recently, few economists expected rate hikes to be on the table at all this summer. Most thought the bank’s aggressive monetary policy tightening campaign of 2022 and early 2023 would have dragged the Canadian economy into a recession by now.
But consumer spending and employment have proven surprisingly resilient to higher borrowing costs. In June, the central bank concluded that interest rates weren’t “sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2 per cent target.”
The question for policymakers today is whether the June hike, which lifted the policy rate to 4.75 per cent, was enough or whether another move is needed to finish the job.
Canadian economic data was uniformly strong ahead of the June decision. It is now more mixed. Job creation, for example, exceeded expectations last month, but wage growth slowed and unemployment ticked up.
Consumer price index inflation continues to fall, hitting an annual rate of 3.4 per cent in May, largely thanks to lower oil prices. However, “core” measures of inflation, which strip out volatile energy and food prices, are proving sticky.
Most Bay Street analysts, including those at Canada’s Big Six banks, think there is enough economic momentum to justify a final quarter-point rate hike today. Financial markets are pricing in a roughly 70-per-cent chance of this happening.
A rate hike is not, however, a done deal. The Bank of Canada has surprised markets many times over the past year and a half. And it could take a page out of the U.S Federal Reserve’s playbook and skip a meeting while signalling more rate hikes ahead.
The rate announcement is scheduled for 10 a.m. ET, followed by a news conference by Governor Tiff Macklem at 11 a.m. The central bank will publish new economic growth and inflation forecasts in its quarterly monetary policy report.
Read more about today’s Bank of Canada announcement.