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The latest on the Bank of Canada's interest rate decision

The Bank of Canada has resumed its monetary policy tightening campaign, increasing its benchmark rate by a quarter percentage point on Wednesday.

The decision lifts the policy rate to 4.75 per cent, the highest level since May, 2001, pushing up mortgage rates and squeezing household budgets.

The central bank's campaign had been on hold since January as it waited to see if borrowing costs were high enough to get inflation under control. However, a run of stronger-than-expected data over the past month called that “conditional pause” into question and brought the bank off the sidelines.

Find updates from our reporters and columnists below.

1:20 p.m.

What’s next?

  • Deputy governor Paul Beaudry will deliver an economic progress report on Thursday outlining the bank’s rationale for this week’s decision. The speech to the Victoria Chamber of Commerce starts at 3:25 p.m. ET, with a press conference 4:45 p.m. It will be Mr. Beaudry’s last appearance before he retires from the bank in July.
  • The Bank of Canada’s next rate decision is on July 12, when it will also publish an updated projection for economic growth and inflation.
  • Statistics Canada will release May Labour Force Survey data on Friday. Central bankers will be watching this closely for signs that the labour market is weakening. This could mean an uptick in unemployment or a slowdown in the pace of wage growth. May consumer price index data –which tracks inflation – will be published on June 27.
  • The U.S. Federal Reserve’s next rate announcement is on June 14. Chair Jerome Powell suggested last month that the central bank could pause its rate-hike campaign at the next meeting. However, stronger-than-expected economic data has kept open the possibility of a least one more rate increase this summer.

– Mark Rendell

6:45 p.m.

Higher interest rates are coming for mortgage borrowers

The central bank’s decision to increase its trend-setting rate to 4.75 per cent will immediately affect a broad swath of Canadians with variable-rate loans, who may see their debt payments reset upward or their mortgage amortizations stretch out.

But the central bank’s move also highlights concerns about stubbornly high inflation amid a surprisingly resilient economy, worries that are affecting financial markets and putting upward pressure on interest rates for new and renewing mortgages as well. That, analysts warn, represents a challenge for new homebuyers and those with upcoming mortgage renewals, two groups who are overwhelmingly choosing fixed rates in the current environment.

Overall, the latest rate increase will likely drive a further uptick in consumer delinquencies and weigh on a recent rebound in home prices, experts say. It could also have ripple effects in the rental market, forcing some landlords to off-load investment properties due to rising mortgage costs.

– Erica Alini

1 p.m.

What the BoC decision means for Canada’s housing market

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A person walks by a row of houses in Toronto.COLE BURSTON/The Canadian Press

Wednesday’s rate hike could act as a brake on the housing market, which has rebounded in recent months, pushing up home prices.

After the central bank paused its rate-hike campaign in January, would-be home buyers crowded back into the market and bidding wars resumed. Home sales jumped 11.3 per cent from March to April, and the national home price index climbed 1.6 per cent in April, according to the Canadian Real Estate Association.

This is not what the central bank wanted to see at this point in the business cycle.

Potential buyers “had these larger down payments ready, and they were ready to jump back into the market when they saw these signs of an uptick in demand and prices, and they were encouraged to do so by this idea that the bank is done hiking and cuts were imminent,” Farah Omran, an economist with Bank of Nova Scotia, said in an interview.

With today’s hike, the bank is increasing the cost of both fixed-rate and variable-rate mortgages, which should curb demand for home loans. It’s also adding uncertainty into the market, which could change the psychology of would-be buyers, pushing them back to the sidelines.

“It’s signaling that the pause may be over, which would help thwart the speculative activity that is driven by this assumption that rates are stabilizing and declining [soon],” Ms. Omran said.

– Mark Rendell

12:45 p.m.

Opinion: On fighting inflation, central banks are getting way too confident

Canada’s recent experience with inflation mirrors those of other developed economies. After falling for several months, it recently plateaued, with core inflation even ticking back up in places. Those who read me regularly will know that I’ve been predicting that for a while now and even though the Bank of Canada insists we will eventually return to 2 per cent inflation, I remain doubtful.

Like all central banks, the Bank of Canada has been too confident in its abilities and is now struggling to account for the persistence of inflation and the resilience of the economy despite its sharpest monetary tightening in decades.

It’s not like the bank hasn’t done everything by the book. The conventional theory of inflation attributes it to excess money supply creating a surge in demand, with the principal channel coming through the labour market: high employment and healthy wages means workers spend, keeping the economy hot. So by raising interest rates, central banks can discourage people from spending and encourage them to save or pay off their debts, thereby tamping demand. That’s what the banks have done, yet here we still are.

Read the full opinion column on the central bank’s decision to continue raising interest rates.

– John Rapley

12:05 p.m.

Poilievre calls today’s BoC rate hike ‘a disaster for many Canadians’

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In a statement, Conservative Party Leader Pierre Poilievre called the latest BoC rate decision “a disaster for the many Canadians barely hanging on.”Adrian Wyld/The Canadian Press

The Bank of Canada’s latest rate hike drew condemnation from across the political spectrum. In a statement, Conservative Party Leader Pierre Poilievre called it “a disaster for the many Canadians barely hanging on.” He blamed government spending and budget deficits for pushing up inflation.

Bea Bruske, president of the Canadian Labour Congress, called the rate hike “deeply disappointing.”

“Instead of blunt interest rate hikes, Canadians need balanced, targeted monetary policy and interventions from governments to tackle the true causes of inflation,” she said in a statement.

The central bank has come under political attack over the past year and a half - first for failing to keep inflation under control, then for its aggressive campaign to raise interest rates to bring inflation back down, which has slammed mortgage holders especially hard. During his leadership campaign last year, Mr. Poilievre said he would fire Bank of Canada Governor Tiff Macklem, while NDP Leader Jagmeet Singh has sharply criticized the bank’s approach to monetary policy.

In a news conference after the rate announcement, Finance Minister Chrystia Freeland emphasized the strength of the Canadian economy and the global nature of inflation.

”We are very close to the end of this difficult time,” she said. “There are a lot of Canadians who are anxious right now and who will be concerned when they see this step taken by the Bank of Canada. That is entirely understandable, and I absolutely understand that anxiety and that concern.”

The government sets the high-level priorities for the Bank of Canada every five years, but the central bank is independent on a day-to-day basis.

– Mark Rendell

11:40 a.m.

Canadian dollar rises to four-week high as BoC resumes rate hikes

The Canadian dollar CADUSD strengthened to a four-week high against its U.S. counterpart as investors bet that the Bank of Canada would continue to raise interest rates for the first time since January.

“The tone of the statement was pretty hawkish, which is not a surprise given the recent data flow,” Benjamin Reitzes, Canadian rates & macro strategist at BMO Capital Markets, said in a note. “If the data remain firm over the coming few weeks, another 25 basis point hike in July looks likely.”

Money markets see a roughly 60-per-cent chance of another rate increase in July and have fully priced in further tightening by September.

The Canadian dollar was trading 0.4 per cent higher at 1.3350 to the greenback, or 74.91 U.S. cents, after touching its strongest intraday level since May 8 at 1.3322.

– Reuters

11:30 a.m.

Analysis: Takeaways from the BoC rate decision

Am I shocked by the Bank of Canada’s quarter-percentage-point rate hike this morning? No. But I am surprised. This requires some rethinking of how to interpret the central bank’s communications.

In this morning’s announcement, the bank underlined that it decided to resume rate hikes “based on an accumulation of evidence.” Yet it wasn’t necessarily the “evidence” the bank had previously specified it was focusing on to determine whether it would need further rate increases to bring inflation down to the 2-per-cent target.

The bank had communicated, specifically, that it would watch the evolution of core inflation, service-sector inflation, business pricing behaviour, wage growth and inflation expectations. This bundle of indicators appeared to be what the bank would need to accumulate, in one direction or another, to move its interest rate stand away from on hold.

But the key phrase in this morning’s announcement is found at the end of the third paragraph: “Overall, excess demand in the economy looks more persistent than anticipated.”

Bottom line: The bank looked at the big-picture economic data – most importantly, last week’s stronger-than-expected first-quarter GDP report – and saw more excess demand in the economy than it had bargained for at this point. This created a sense of urgency that appears to have pushed those other indicators to the back burner of the bank’s analysis.

Despite having put rates on pause in order to take a wait-and-see approach, it seems the bank is not, in fact, willing to wait and see if the GDP numbers – or April’s small uptick in inflation, or the recent upturn in housing activity – are short-term blips. They have overruled waiting to see how those other indicators evolve.

The big question now is, where do we go from here? On that, the bank offered few helpful clues. In the final paragraph of today’s statement – where the bank typically signals future direction – the bank only says its governing council will “continue to assess the dynamics of core inflation and the outlook for [consumer price index] inflation.” It doesn’t talk about assessing whether rates are “sufficiently restrictive,” as it did in the April rate statement – perhaps suggesting that another rate hike in July is not in the bank’s base-case plan.

But without further information, it’s hard to know just how to frame this. I’ll look to Thursday’s post-announcement speech from deputy governor Paul Beaudry to get a clearer sense of what the bank is thinking. The Bank of Canada certainly has some explaining to do.

– David Parkinson

10:45 a.m.

TSX pares gains after BoC rate hike

Canadian stocks pared gains Wednesday after the central bank’s decision to raise its benchmark interest rate, while a boost from energy shares helped keep the main stock index afloat.

The Toronto Stock Exchange’s S&P/TSX composite index was up 0.05 per cent after rising as much as 0.4 per cent to 20,149.95 ahead of the rate decision.

“It was either now or in July that they probably needed to give a token 25 bps (hike),” said Diana Avigdor, portfolio manager and head of trading at Barometer Capital Management. “The silver lining is that the economy is not falling apart, however, rate hikes play through the economy over 18 to 24 months and central bankers have to be careful and not look at today’s data but rather what can happen in a year or two.”

Energy stocks jumped 1.3 per cent, tracking firm oil prices.

Materials stocks gained 0.8 per cent as copper prices hit their highest level in nearly four weeks on hopes that China would inject more stimulus into its economy.

North West Company dropped 4.8 per cent after the food retailer reported quarterly profit below market expectations, pulling consumer staples to the bottom of the sector indexes.

On the flipside, financials fell 0.4 per cent.

– Reuters

10:40 a.m.

A look at the markets after today’s Bank of Canada rate hike

The two-year Government of Canada bond yield jumped 20 basis points immediately after the quarter-percentage-point rate hike by the Bank of Canada. This indicates that the market was caught slightly wrong-footed and had not completely priced the hike into short-term bonds.

The two-year yield, which had already climbed 80 basis points from the spring lows ahead of the central bank meeting, is now 4.55 per cent, the highest since 2007.

– Scott Barlow

10:30 a.m.

Economists react to today’s BoC rate announcement

Here is how analysts on Bay Street reacted to Wednesday’s decision.

Royce Mendes, head of macro strategy at Desjardins Capital Markets: “Monetary policymakers will be watching the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour in deciding whether rates need to move even higher. That said, it’s unlikely they’ll see enough progress toward restoring price stability before their next scheduled rate decision for this to be the final hike of the cycle. As a result, we continue to lean toward another 25-basis-point rate hike in July, which would take the policy rate up to 5 per cent, the highest since 2001. The market is now close to pricing that in, with bond yields selling off as rate cuts are pushed further into the future.”

Stephen Brown, Deputy Chief North America Economist with Capital Economics: “The Bank of Canada’s 25-basis-point interest rate hike today is unlikely to be the last, with the rapid turnaround in the housing market and concerning underlying inflation dynamics raising the case for at least one more hike in July, to take the policy rate to 5 per cent. ... The bank noted that the decision to hike was based on the view that “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2-per-cent target.” It is hard to see how a single 25-basis-point hike will materially change that assessment unless the CPI and labour market data before the July meeting – in just five weeks’ time – is materially weaker than we currently expect. Accordingly, there is a strong chance of the bank enacting another 25-basis-point hike at the next meeting, ahead of its summer break.”

Katherine Judge, Senior Economist at Canadian Imperial Bank of Commerce: “The Bank of Canada hiked rates by 25 basis points to bring the overnight rate to 4.75 per cent. That was justified by the unexpected strength in consumption growth and interest-sensitive areas of the economy, along with the tightness in the labour market. The statement also highlighted concerns that inflation could get stuck materially above the 2-per-cent target, given the recent readings on core inflation and persistent excess demand. It’s therefore possible that we could see a follow-up hike if signs of economic slack opening up aren’t clear in forthcoming data, although the guidance around being prepared to raise the policy rate further was removed from this statement.”

– Mark Rendell

10 a.m.

Bank of Canada raises key interest rate to 4.75 per cent

The Bank of Canada has raised its benchmark interest rate to 4.75 per cent, restarting its monetary policy tightening campaign in response to stubborn inflation and surprising resilience in the Canadian economy.

The quarter-point rate hike increases borrowing costs for the first time since January, pushing up Canadian mortgage rates and squeezing household budgets. The last time the policy rate was 4.75 per cent was in May, 2001.

Central bank officials kept interest rates steady over the past two rate announcements while they waited to see if borrowing costs were high enough to bring inflation under control. A run of stronger-than-expected data over the past month – showing robust consumer spending, a tight labour market and a rebound in housing market activity – called that “conditional pause” into question.

”Based on the accumulation of evidence, Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2-per-cent target,” the bank said Wednesday in its rate announcement.

Read the full story on today’s BoC rate announcement.

– Mark Rendell

9:20 a.m.

Mortgage markets tighten ahead of today’s BoC decision

Bank of Montreal economist Robert Kavcic described how mortgage markets have tightened ahead of today’s Bank of Canada meeting:

“Canadian 2-year yields pushed to 4.4 per cent on Tuesday ahead of Wednesday’s BoC announcement, the highest level since 2007. Five-year yields haven’t quite pushed through the highs set late last year, but they are up almost 80 bps since the early spring lows. It was those spring lows in bond yields that helped pull down fixed mortgage rates, especially those with shorter (e.g., 2- and 3-year) terms. Sub-5 per cent rates in that space helped put a floor under housing activity and prices, even while variable rates pushed above 6 per cent and didn’t look back. Now, it looks like those lower fixed rates are disappearing given the recent move in yields. Regardless of if the BoC raises rates on Wednesday, they’re probably going to talk tough, and the market has already priced in further tightening later in the year. We’ll see if this takes some momentum out of housing after a strong firming through the spring.”

Read the daily roundup of research and analysis from The Globe and Mail’s market strategist Scott Barlow.

– Scott Barlow

9 a.m.

Analysis: What to look for during today’s BoC decision

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The Bank of Canada is set to announce its interest rate decision this morning as speculation about another rate hike heats up.Sean Kilpatrick/The Canadian Press

Obviously, the first thing to look for in Wednesday’s Bank of Canada interest-rate announcement is the interest rate. Talk of a resumption of rate increases has grown as higher-than-expected inflation and GDP data rolled out over the past few weeks. Personally, I don’t expect a rate hike, but a quarter-point increase is absolutely on the table. (By late Tuesday afternoon, markets were pricing hike-vs-hold as pretty much a coin toss.)

One key reason why I think the bank will opt to hold the line on rates – for now, anyway – is the nature of the announcement itself. This is one of the bank’s rate decisions that falls in between quarterly Monetary Policy Reports. The bank won’t have a lengthy supporting document detailing its policy thinking, economic outlook and view of risks; nor will it hold the post-MPR news conference to explain the decision and discuss its implications.

Rather, it will have just the handful of paragraphs in the rate-announcement statement to make its case. Will Governor Tiff Macklem feel that this is adequate to explain a significant policy shift, one that could generate a great deal of uncertainty about the future of rates? I think not. It would be out of character for a governor who has generally preferred to signal his policy shifts well in advance.

Whether the bank hikes or not, my focus will be on any hints the statement drops about where rates are heading next. That might be tricky to parse, but the more pessimistic the bank sounds about the direction of inflation pressures, the more likely that it is setting the stage for a quarter-point increase at its mid-July decision.

In particular, I want to know how the bank characterizes the surprises in the inflation and GDP numbers. I’m also looking for the bank’s view of the indicators that it has identified as central to determining whether rates are already high enough to return inflation to the 2-per-cent target: core inflation, service-sector inflation, wage growth, business pricing behaviour and inflation expectations.

Might the Bank of Canada use the June announcement to set us up for a July rate hike? That’s a definite maybe. Remember that after the mid-July rate decision, the bank will go silent over the summer. (Yes, central bankers take summer vacations, too.) There will be an eight-week gap between rate announcements. If the bank believes it will eventually need to raise rates, odds are that it will want to make the move before the summer break. For that reason, Wednesday’s announcement could well be worded in a way that puts a July hike in play – especially if the bank doesn’t raise rates now.

– David Parkinson

8 a.m.

Bank of Canada’s ‘conditional pause’ to rate-hikes could be tested

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Bank of Canada Governor Tiff Macklem holds a press conference in Ottawa after the release of the 2023 bank's financial system review.PATRICK DOYLE/The Canadian Press

Bank of Canada Governor Tiff Macklem has stressed in recent months that the central bank could raise interest rates again if the economy doesn’t cool as quickly as expected. That pledge will be tested today.

After shocking the Canadian economy with eight consecutive rate hikes, Mr. Macklem and his team have kept the benchmark rate steady at 4.5 per cent since January, waiting to see if borrowing costs are high enough to bring inflation back under control.

Economic data over the past month has called this “conditional pause” into question. The annual rate of inflation rose to 4.4 per cent in April, up from 4.3 per cent in March. Meanwhile, the Canadian economy grew faster than expected in the first quarter, unemployment remains near a record low, and the housing market is showing signs of a rebound.

This isn’t what central bankers want to see at this stage in the business cycle. They believe the economy needs to stall to bring demand and supply back in line, thereby slowing the pace of consumer price growth. If that doesn’t happen, inflation could get stuck above the bank’s 2-per-cent target, Mr. Macklem has argued in recent appearances.

A growing number of Bay Street analysts are betting on at least one more quarter-point interest-rate increase this summer, with the more hawkish among them expecting a rate hike today. Even cautious observers, who think the bank will remain on hold today, aren’t ruling out the possibility of a rate hike.

The monetary policy decision will be released at 10am EST. There will be no updated economic forecast, and no press conference. Deputy governor Paul Beaudry will deliver a speech explaining the rate decision on Thursday at 3:25pm EST.

Read more about today’s Bank of Canada announcement.

– Mark Rendell

Follow Mark Rendell on Twitter: @mark_rendellOpens in a new window
Follow David Parkinson on Twitter: @ParkinsonGlobeOpens in a new window

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