BoC Hikes Interest Rates For Sixth Consecutive Time

The Bank of Canada complex on Ottawa’s Wellington Street. (Photo via bankofcanadamuseum.ca).

The Bank of Canada has increased the target overnight rate by 50 basis points to 3.75% as it continues its policy of quantitative tightening.

The central bank has raised rates six consecutive times since March in one of the fastest occurrences of rate hikes in Canadian history.

The yield on the two-year government bond fell 20 bps after the announcement. The Canadian dollar initially fell against the U.S. dollar.

Bank of Canada’s overnight lending rate in the last 10 years.

Since June, inflation has decreased from 8.1% to 6.9% which is seen as a positive sign. However, most of the decline reflects a drop in gasoline prices across the country. Inflation in Canada is broad-based and about two-thirds of the components that derive the consumer price index (CPI) have risen by over 5% in the last year.

“Rising prices for essentials like groceries and rent are hitting lower income Canadians particularly hard,” said Tiff Macklem, the Bank of Canada’s Governor in his opening statement on Wednesday.

Inflation remains high and broadly based around the globe. Largely this is influenced by global recovery from the pandemic, global supply chain disruptions, and elevated commodity prices, such as energy due to Russia’s invasion of Ukraine.

On top of that, businesses in Canada continue to report widespread labour shortages. With the economy reopened after the pandemic, businesses cannot keep up with strong demand, thus leading to a rise in the price of goods and services.

The Bank of Canada expects inflation to hover around 7% in the final quarter of 2022, fall to around 3% by the end of 2023 then return to the 2% target by the end of 2024.

“Higher interest rates in the short term will bring inflation down in the long term. And getting through this difficult phase will get us back to price stability with sustained growth,” Macklem continued.

The Bank expects interest rates to rise further in the near future, albeit with a more dovish tone than prior announcements. Canada’s economy is tightening, as a result of previous rate hikes, but more is needed if it wishes to achieve its 2% inflation target.

Macklem explained that if the Bank does not continue to hike rates, Canadians will continue to endure the difficulties associated with high inflation. 

“[Canadians] will come to expect persistently high inflation, which will require much higher interest rates and potentially a severe recession to control inflation. Nobody wants that.”

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.