The Bank of Canada raised its policy interest rate for the seventh time this year with a 50 basis point hike Wednesday morning. The policy rate now sits at 4.25%, the highest level since early 2008.

The Bank’s decision continues along its policy of quantitative tightening, albeit with a dovish tone this time around, signaling that it may be nearing the end of its historic rate-hike cycle.

Canadian bond yields rose slightly and the Loonie strengthened against the US dollar following the announcement.

In a press release, the Governing Council said it will be considering whether the policy interest rate needs to rise further to balance supply and demand and return inflation back to its 2% target.

Consumers are seeing many of the goods and services showing large price increases, such as motor fuel and mortgages, but are offset by the slower inflation for food. With that in mind, Canada’s national inflation rate sits at 6.9%, remaining unchanged from the prior month.

Inflation has trended down since the summer, but the Bank still believes that inflation is too high and short-term expectations remain elevated. “The longer that consumers and businesses expect inflation to be above the target, the greater the risk that elevated inflation becomes entrenched”, the report states.

Global inflation remains high and broadly based while global economic growth is slowing. South of the border, the United States’ economy is weakening but consumption continues steadily and its labour market remains overheated.

Canada’s commodity exports have been strong but the evidence is showing that rising interest rates are “restraining domestic demand,” the Bank has said. This has led to moderate consumption and a declining housing market in the third quarter.

The report indicates that gradual easing of global supply bottlenecks continues, although further progress could be disrupted by geopolitical events, such as Russia’s ongoing invasion of Ukraine.

Last Friday, Statistics Canada released its monthly unemployment numbers, showing Canada’s unemployment rate declining from 5.2% to 5.1%. These results indicate that Canada’s labour market remains tight with unemployment near historic lows.

Meanwhile, in British Columbia unemployment rose from 4.2% to 4.4%, primarily driven by job losses in the construction sector.

Deputy Governor Sharon Kozicki will speak on Thursday to explain the Bank’s decision. The next scheduled announcement on the Bank’s overnight rate target is January 25, 2023.

The guidance we give our clients remains the same. Invest in blue chip stocks and take advantage of the rising interest rate environment with some short-term fixed-income securities such as bonds and Guaranteed Investment Certificates.

As always, if you have any questions about today’s Market Update, you can call us at 604-643-0101 or email cashgroup@cgf.com.