BoC Rate Hike and U.S Inflation

Bank of Canada Increases Target Rate by 1%

The Bank of Canada (BoC) announced a surprise 1% increase to its benchmark interest rate yesterday morning, signaling the largest rate hike since 1998. Most forecasts were expecting a 0.75% hike, which would have aligned with the US Federal Reserve’s recent interest rate hike in June. However, the BoC decided to go with a more aggressive policy to “front-load the path to higher interest rates”. This strategy is in direct response to elevated inflation numbers over the past several months, most recently hitting +7.7% year-over-year in May.

One of the BoC’s main objectives is to keep inflation around the target rate of 2%, although that is easier said than done when dealing with the economic aftermath of the pandemic coupled with an international conflict in Ukraine. With higher costs hitting Canadians’ wallets and inflation eroding their savings, the central bank is forced to use one of its most prominent economic tools: the benchmark interest rate. The higher the rate rises, the more the economy will slow down due to higher interest costs eating away at disposable income.

The benchmark rate now sits at 2.5% and the market is expecting the rate to reach 3.75% - 4% by the end of 2022 – which leaves another 1.5% increase to be split across the remaining three meetings this year. The frequency of those increases largely depends on the next two inflation reports from the Canadian Government being released on July 20 and August 16. If they continue to increase, expect a more aggressive policy.

Photo by Joachim Schnürle on Unsplash

U.S Inflation report for June 2022

Yesterday morning, the United States announced the June inflation numbers, which posted a +9.1% increase year-over-year and a +1.3% increase month-over-month. This is the largest year-over-year gain since 1981 and largest month-over-month increase since 2005.

Throughout this year, high inflation numbers have primarily been driven by volatile food and energy costs due to Russia’s war in Ukraine and China’s COVID lockdowns. Perhaps the most concerning part of this recent report is the amount that other goods and services are increasing. For example, rental costs rose 0.8% in June, the largest monthly increase since April 1986.Medical care costs increased 0.7% month-over-month, the largest monthly rise ever recorded.

These numbers are notable because unlike volatile food and oil prices, price increases for these other goods and services tend to become permanent unless there is a drastic change in consumer demand. The Federal Reserve is likely to become more aggressive with its benchmark interest rate because of such a high inflation report and could follow the Bank of Canada into a 1% hike at the next rate announcement on July 27

As always if you have any questions about interest rates, you can call us at 604-643-0101 or email cashgroup@cgf.com