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Bank of Canada raises the key interest rate by one-half of a percentage point (0.50%), bringing it to 4.25%

The Bank of Canada has raised its policy rate to 4.25% today, stating borrowing costs need to rise to bring inflation back to target of 2% from the current rate of 6.9%. This marks the seventh consecutive rate increase in 2022. "We're expecting roughly zero growth (in the Canadian economy) for the next several quarters and to be more specific, the last quarter of this year the first half of next year", said Bank of Canada Governor, Tiff Macklem, recently. Climbing interest rates, dramatic declines in real household consumption, high inflation, house price and house sale declines in Canada's major cities with the exception of Atlantic Canada and the Prairies, and zero or negative growth in our economy all point to a mild, short recession mid-year 2023. Recessions typically bring inflation down – consumer demand for goods drops, supply chains are able to recover, and unemployment rates rise as businesses lay off workers and wages stagnate. This in turn leads to even less demand for goods and services.

At the end of 2024, inflation should be closer to the desired target rate of 2%, and the Bank of Canada will then likely lower rates to improve the overall economy. Housing demand should once again rise due to lower interest rates and this improving demand backdrop will likely yield an increase in average home prices and sales activity.

The next rate-setting day is January 25th, 2023.

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Today’s Bank of Canada rate hold announcement marks almost four straight years that the key benchmark rate has remained unchanged, since September 8, 2010. Great news if you have a variable-rate mortgage or home equity line of credit; the prime rate stays at 3%.

 

The announcement noted that “the risks to the outlook for inflation remain roughly balanced, while the risks associated with household imbalances have not diminished.” With these considerations, the Bank is maintaining its monetary policy stimulus, and remains neutral with respect to the timing and direction of the next change.

 

The next rate-setting day is October 22nd.

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