The Bank of Canada has raised its policy rate three times in 2022, to 1.5 per cent today from a pandemic low starting in March of 2020 of 0.25 per cent. Bank of Canada Deputy Governor Toni Gravelle stated borrowing costs need to rise quickly to more normal levels to bring inflation back to target of 2% from its current high this month of 6.8%, and that the current policy interest rate was "too stimulative". The Bank of Canada has warned that the overnight rate needs to rise further into the neutral range of 2% to 3% to cool domestic inflation and bring the economy back to balance without triggering a recession or stagflation.
The Bank of Canada understands that the Canadian economy is likely more sensitive to rising borrowing costs than it used to be. During the pandemic, investors moved heavily into the housing market such that one in five home purchases originate from this group, and many borrowers have crushing loan-to-income ratios.
"Rising interest rates are designed to slow the economy by making borrowing more expensive. That tends to slow sectors like housing," said Toni Gravelle, "But this slowing might be amplified this time around because highly indebted households will face high debt-servicing costs and will likely reduce household spending more than they would have otherwise. Our base-case scenario includes a slowdown in housing activity. But we could see a larger-than-expected slowdown due to higher indebtedness and unsustainably high housing prices."
Expect more rate hikes throughout 2022 from the Bank of Canada. Recall that just over three years ago the overnight rate, in October of 2018, was 1.75%, the highest overnight rate from 2008 to today. Canada had enjoyed 14 years of extremely low policy rates.
The next rate-setting day is July 13th, 2022.
Post Your Comment: