Interest Rates Are at the Highest Level: Are More Rate Hikes to Come?

Canada’s inflation rate peaked at 8.1% in June 2022. A year later and its at 3.4%. That’s a big drop, and getting close to the long-term average of 3.15%, but it’s not low enough for the Bank of Canada, which just announced it raised its key interest rate by 25 basis points to 5.0%.

To put that interest rate into perspective, Canada’s interest rate was 0.25% at the start of 2022. Bay Street analysts had widely expected the rate hike, which is the second in a row since the Bank of Canada ended its pause in June.

The Bank said that while global inflation is easing, Canada’s economy has been more resilient than expected, with more momentum in demand for goods. In the first quarter, consumption growth was unexpectedly strong at 5.8%. The labour market also remains strong, with wage growth at about 4% to 5%. And despite interest rates being at their highest level in 22 years, the housing sector remains hot.

Analysts expect growth to cool as higher interest rates work their way through the economy. It typically takes 18 to 24 months to see the full effects of any changes to interest rates. Canada’s gross domestic product (GDP) is expected to grow at a 1.8% pace this year and 1.2% clip in 2024.

Will The Bank of Canada Raise Interest Rates Again in September?

A cooling economy is one of the outcomes the Bank of Canada wants to see, but it also wants to get a handle on inflation. While the consumer price index has fallen from its 8.1% peak last year to 3.4% in May, the drop has mostly come from lower energy prices. Core inflation has hovered at around 3.5% to 4.0%.

The Bank of Canada does see inflation eventually getting back to its target range, but not until the middle of 2025, which is about six months later than expected.

Tiff Macklem, Governor of the Bank of Canada said that more rate hikes could be coming. “If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to.”

Canadians with variable mortgages and credit card debt may not like the recent rate hike, but Bay Street did. The Loonie jumped to its highest intra-day level since late June, trading at USD$0.76 after the rate decision was released early July 12.

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The Bank of Canada raised its key interest rate by a quarter of a percentage point to 5.0%, the highest level in 22 years, as the Canadian economy continues to run hotter than expected. It’s outlook also suggests it will take longer than initially projected to get inflation back to its two percent target range. To understand how this will affect the stock market, speak with the trading experts at Learn-To-Trade.com.

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Related: Bank of Canada Holds Interest Rate at 5% as Economy and Corporate Earnings Slow