On Wednesday, the Bank of Canada (BoC) raised interest rates by 50 basis points, against the initial projection of 75 basis points. The country started this fiscal year with a benchmark rate of around 0.25 percent. The latest benchmark rate hike, the sixth consecutive, brought the rate to 3.75 percent.
BoC governor Tiff Macklem explained that its tightening phase was getting closer to an end but was “not there yet.” The governor admitted that the country’s current rates were “already considerably higher.” With signs of economic slowdown, the central bank decided to downgrade its tightening approach “from very big steps to a big step.”
BREAKING: @bankofcanada boosts its key rate another 50 bps to 3.75%.
— Rob McLister (@RobMcLister) October 26, 2022
Prime at the big banks should move to 5.95%, effective tomorrow—highest since 2007.
Adjustable-rate payments will jump ~48% compared to payments on March 1, assuming a prime - 1% rate & 25yr amortization.
The central bank still emphasized the importance of doing more hikes since the economy had yet to slow down enough. It said that future rate increases would be determined by assessments of the impact of tight monetary policy on the demand-supply chain and the response to inflation and inflation expectations.
A report published by two economists at CIBC, Andrew Grantham and Karyne Charbonneau, underlined that the lower hike this month did not necessarily mean BoC’s target benchmark rate had declined. Grantham and Charbonneau predicted that at the end of the tightening phase, the rate would be at 4.25 percent.
"The fact that core inflation hasn’t slowed, inflation expectations remain elevated and demand is still outrunning supply, the Bank could have easily justified a larger rate hike,” the report said. “That said, the risk of such an aggressive move apparently outweighed the reward.”
The BoC hikes its interest rates to bring inflation down to its two percent target. The country's worst inflation happened in June, and the ongoing rate increases have yet to tame it.
Canada's consumer price index in September revealed a lower rate of 6.9 percent, in correlation to a decrease in fuel costs. Reports also showed that food prices had climbed at a rate unprecedented in over four decades.
BoC’s aggressive tightening has taken effect on consumers, with 57 percent of citizens admitting that it affects their lives, per Yahoo/Maru Public Opinion. Eighteen percent of respondents even said they were “worried sicks” about the impact of BoC’s policy on their families.
The Bank of Canada signals it’s nearing the end of its interest-rate hiking campaign, potentially providing a model for counterparts elsewhere as recession risks mount https://t.co/FSImv1NxBp
— Bloomberg (@business) October 26, 2022
Growth projection slashed
BoC’s Monetary Policy Report published on Wednesday showed that the bank had revised its 2023 growth projection from 1.8 percent to 0.9 percent. The report also projected that the Canadian economy would grow by up to 3.3 percent by the end of 2022, with the previous projection being 3.5 percent.
The central bank also predicted that the country’s GDP growth from Q4 of 2022 to Q1 of 2023 would decline by 0.25 percent or lower. According to BoC, it is possible for Canada to see a “slightly” negative GDP growth for two quarters, which is an indicator of a technical recession.
Macklem, however, assured that it was not a sign of “a severe contraction” and, instead, just a slowdown in the economic system. The BoC governor explained that the low GDP growth would allow the supply chain to “catch up” with the demand pressures to lower consumer prices.
"Unfortunately, there's no easy way of restoring price stability,” Macklem added. “We actually need a period of slower growth to let supply catch up and relieve those price pressures."