On June 1st, 2022, The Bank of Canada increased its target for the overnight rate to 1.5%, with the Bank Rate at 1.75% and the deposit rate at 1.5% and it is expected to increase again. This rate hike announcement follows up on the Bank’s rate hike announcement back in April 2022 to raise rates by 50 basis points to 1%, which was the largest individual rate hike since 2000. This is a large contrast compared to the beginning of the year when the policy rate was at 0.50%. The decision to raise its rate by half a percentage point again is due to high inflation and housing prices.
Due to the higher prices for energy, food, gas and properties as well, inflation continues to rise in Canada and globally. Exceeding the Bank’s forecast, the CPI inflation rate in Canada reached 6.8% for the month of April, and it is expected to move even higher in the near term before beginning to ease. Another rate hike is expected at the Bank of Canada’s next meeting on July 13, 2022, with a potential to bring the policy rate to 2.00%
Some highlights from the Bank of Canada’s June 1, 2022 announcement include:
The Target Overnight Rate will increase by 50 basis points to 1.50%
CPI inflation of 6.8% is at a 31-year high
Canada’s housing market has slowed down over the past few months as interest rates rise.
Quantitative tightening (QT) began on April 25, 2022. This will gradually reduce the Bank of Canada’s balance sheet and put upward pressure on bond yields, which will drive up fixed mortgage rates
Borrowing costs are increasing
When the Federal Reserve raises their rates, it makes borrowing more expensive for consumers. In the week ending on June 9, 2022, the rate for a 30-year-fixed-rate mortgage averaged 5.23%, which is a significant increase from 3% this time last year. This means higher interest rate costs for mortgages, HELOCs, credit cards, student debt and car loans. Small and large businesses will also be impacted by this rate increase. Rate hikes have driven up rates and slowed down sales activity which could potentially cool off home prices.
Bank of Canada Information
What is the Bank of Canada?
The Bank of Canada was founded in 1934 and is the Nation’s central bank. Their main goal is to promote the economic and financial welfare of Canada. It is led by the Governing Council, which is made up of the Governor, the Senior Deputy Governor and the Deputy Governors. They are the policy-making body of the Bank which is responsible for conducting monetary policy and promoting a safe and efficient financial system. The Bank’s Executive Council is made up of the governing council and the Chief Operating Officer and together they chart the strategic direction of the Bank.
What does the Bank of Canada do?
The Bank of Canada exists to regulate credit and currency in the best interest of the economic life of the nation. The Bank’s main areas of responsibility are:
Within Canada and internationally, The Bank of Canada promotes safe and efficient financial systems and also conducts transactions in financial markets in support of these objectives.
The Bank of Canada influences the supply of money that circulates the economy. The bank uses its monetary policy framework in order to keep inflation stable and low.
The Bank of Canada is responsible for the designing, issuing and distribution of Canada’s bank notes.
The Bank of Canada manages the public debt programs and foreign exchange reserves for the Government of Canada and is considered the “fiscal agent” for the Government of Canada.
Retail payments supervision
Under the Retail Payment Activities Act, the Bank of Canada is responsible for supervising payment service providers.