Market Update: Bank of Canada Rate Hike

The Bank of Canada raised its overnight rate by 0.25% to 0.50% this morning at their second meeting of the year.

This is the first of several small rate hikes that are expected this year as the central bank attempts to slow down inflation which reached 5.1% in January, its highest level in decades.

The Bank of Canada has not raised rates since 2018. In response to the COVID pandemic the BoC lowered the rate to 0.25% in March 2020 and it has remained the same since.

Even with this rate hike, inflation is expected to be well above the target rate of 2% over the next few months, as supply chains and commodities begin to be affected by the war in Ukraine, as well as lingering effects from the pandemic.

In a statement accompanying the announcement, the BoC spoke to the war on Ukraine stating that it “will add to inflation around the world”. It added the conflict was “a major new source of uncertainty” within the oil and commodity markets.

Previously, some experts were expecting up to seven rate hikes from the central bank this year. However, the war has given pause to that sentiment, as policymakers wait to see the medium to long-term effects on the global economy.

Most analysts predict another three to four rate hikes by the end of 2022 to help combat rising inflation numbers, which would put the overnight rate at either 1.25% or 1.50%. The Bank of Canada’s next interest rate decision is set for April 13.

From a consumer perspective, these rate hikes have started to be priced into mortgage rates. Today we see RBC, TD and BMO increased their prime rates by 0.25% from 2.45% to 2.7% in line with the BoC.