Canada’s central bank made no changes to its key interest rate but the hikes may not be over. As the market expected, the Bank of Canada (BoC) made no changes to rates this morning. Eroding consumer spending and a slow economy were amongst the reasons cited. They did raise their inflation outlook though, indicating hikes may not be over.
No Change To The Bank of Canada Overnight Rate, As Expected
Canadians with variable rate mortgages can sigh in relief for at least the rest of the afternoon. The BoC overnight rate remains unchanged at 5.0%, as the market expected. It’s currently near the highest level in two decades—a big change for most households in the country. A whole generation of adults have never seen interest rates at this level. Apparently post-Global Financial Crisis-levels of liquidity was thought to be the new normal.
“We held our policy rate steady today because monetary policy is working to cool the economy and relieve price pressures, and we want to give it time to do its job,” explained BoC Governor Macklem, at the rate announcement.
It may sound like Macklem isn’t doing anything but he’s following traditional policy. Monetary policy adjustments take 18 to 24 months to fully hit the market. It’s only been 18 months since the first rate hike of the cycle, meaning existing hikes still have work to do. One Big Six bank believes nearly half the impact from existing rate hikes is still in the pipeline. Time may be the only thing needed.
The BoC’s hawkish tone made it clear it’s too early to dismiss further rate hikes. They warn inflation is sticky and inflationary pressures are re-emerging. If inflation won’t come down further, they’ll have to use further hikes to bring it back in line.
Canada’s Economy Is Slowing Despite A Population Boom
Canada’s economy has slowed considerably over the past few months. The BoC cited household consumption, borrowing, and housing as examples of fading demand. A lot’s changed since they last updated households.
“Since our July MPR, we’ve seen clearer evidence that higher interest rates are moderating spending and rebalancing demand and supply,” he explained.
The BoC is seeing fading expectations, despite persistent and robust population growth. They only see 1% annual growth for real GDP over the next year. Considering that’s slower than the rate of population growth, that’s really slow. Normalized consumer demand isn’t expected until well into 2024.
Bank of Canada Raises Inflation Outlook, Meaning More Hikes May Come
Despite the hawkish tone, virtually no major forecast includes another BoC hike. Both the central bank’s business and consumer outlook surveys indicate broad weakness. Aggressive wage growth and sticky Core CPI are the only big concerns. However, those concerns may be enough to move the rate higher.
No major forecast may see higher rates now, but today’s data can change that. The BoC raised its inflation forecast by 0.2 points to 3.9% in 2023. It made an even bigger revision next year, raising its forecast 0.5 points to 3.0% in 2024. CPI annual growth at 3.0% is 50% higher than the target rate, but still within the tolerance band the BoC uses. Though a large change in just two months means we may be looking at a different picture by December.
At the very least, this means expect interest rates to remain higher for longer.