Mortgage Blog

Bank of Canada Rate Announcement - January 25, 2023

January 25, 2023 | Posted by: Ken Fadel

As was widely expected, the BoC has announced another 0.25% increase to its target for the overnight rate today.  This is the eighth consecutive increase, though it may be the last for awhile.  The BoC’s key rate now sits at 4.50%, the highest it has been since 2007. 

In its accompanying statement, the BoC stated that while inflation is coming down in many countries,  it remains high and broad-based.  The BoC estimates the global economy grew by about 3.50% last year and will slow to around 2% for 2023 and 2.50% in 2024.

In Canada, economic growth has been stronger than expected and labour markets remain tight as the unemployment rate is near historic lows and companies report difficulty finding workers.

However, there is growing evidence, particularly in household spending, that past rate hikes are taking effect.   Consumption growth has diminished from the first half of 2022 and housing market activity has declined substantially. As the effects of rate increases continue to work through the economy, spending by consumers and business alike are expected to decelerate.

The BoC estimates Canada’s economy grew by 3.60% last year, which is slightly higher than was last projected in the fall.  Growth is expected to stall through the middle of 2023 and pick up in the fourth quarter.  GDP growth of about 1.00% is expected for 2023 and approx. 2.00% in 2024.

Inflation has dropped from 8.10% in June to 6.30% in December, reflecting lower gasoline prices and, diminishing prices for durable goods.  Despite this, short-term inflation expectations remain elevated. Year-over-year measures of core inflation still sit around 5%, but 3-month measures have dropped, suggesting that inflation may have peaked.

Inflation is still projected to come down significantly this year with lower energy prices, improvements in global supply chains, and the effects of higher interest rates on spending.  CPI inflation is expected to hit 3% by the middle of 2023 before returning to its 2% target in 2024.

The BoC included in its statement an expectation to hold the policy rate at its current level as long as economic developments continue to progress in line with its current outlook.   At this point, it appears as though they are now going to sit back and monitor the impact of their cumulative rate increases.

All eyes will now be focused on how the economic outlook evolves between now and the BoC’s next scheduled rate announcement on March 8th .

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