Bank of Canada Increases Rate Yet Again

This morning was the Bank of Canada’s final rate announcement of the year, where they confirmed that they will be increasing their overnight rate by another 0.50%. This means that prime rate will now be increasing to 6.45%.

This wasn’t surprising as the hike was expected by all industry professionals. The only debate was whether it would rise by 0.50% or by the standard 0.25%.

By going with the full 0.50%, the Bank of Canada is reducing the chances of additional hikes in 2023. In their previous rate announcement on October 26^th, they were clear that additional rate increases would be required to reach their inflation goal. In today’s announcement they only said that they “will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”

This is another way of saying they don’t know.

Which leads us to the question that’s on everyone’s mind:

Can we expect more rate hikes in 2023?

It’s possible that this could be the last of the rate increases.

It’s also possible that further increases could be on their way as some economists have been predicting.

If there are additional hikes, then I would at least expect them to be for the standard 0.25%. I think most economists agree that we’re near the end of this rate increasing madness. But regardless of whether this was the last hike, or we see one or two more, the worst of it should be behind us. Time will tell.

Oversized Rate Increases Are Rare

While you would never know it by what we’ve experienced in 2022, it’s rare for the Bank of Canada to increase their rate by more than 0.25%. Here is a list of all the oversized rate hikes in the last 25 years:

That’s it. Four times in 25 years, with the last one being more than 22 years ago. All other increases over that period were at the standard 0.25%

In 2022…we’ve seen five oversized increases.

When Will Rates Start To Drop?

We know that rates cuts are coming. It’s just a matter of when they start. Everything comes down to how quickly the BOC can get inflation under control. Their target is for inflation to reach 3.00% by the end of 2023 and 2.00% by the end of 2024. If they can stay on track with these goals, then we may start to see rate cuts sooner than later. 

But if inflation continues to be sticky, then additional rate cuts may required.

Conclusion

No one likes having to pay higher rates on their mortgage. But what’s worse is having to pay significantly higher prices on everything else. This is what the Bank of Canada is trying to prevent. While we’re already paying more for pretty much everything, the Bank is trying to keep it from getting out of control. And to accomplish this, they needed to rapidly increase their rate balance out the current supply and demand. They are deliberately trying to force a recession to reduce consumer spending. Because as long as demand exceeds supply, inflation will continue to rise.

There is still a lot of uncertainty moving forward and anything can happen.

You can read the full announcement from the Bank of Canada here.