Bank of Canada Increases the Prime Rate to 3.7%

The Bank of Canada (BoC) has once again raised the Prime Rate by 50 basis points, or 0.5%, bringing the current Canadian Prime Rate as of June 1st, 2022 to 3.7%. The BoC has now increased its target for the overnight rate to 1.5%, with the Bank Rate at 1.75% and the deposit rate at 1.5%. The Bank is also continuing its policy of quantitative tightening (QT). This is the third Prime rate increase we’ve seen since the beginning of the year. As predicted near the end of 2021, we would, and have been, experiencing a constant increase in rates throughout 2022. Many have considered locking into a fixed rate. Before you do so, we encourage you to read our post about the implications of locking in.

The Bank cited several factors for rationalizing their third rate hike of the year, however, the prominently overlying reason is to avoid “the risk of elevated inflation becoming entrenched.” As a result, the BoC will use employ its monetary policy tools to combat inflation and bring it back to its targetted level. 

Inflation Continues to Cause Concern

Consider rate changes and inflation an inverse relationship. Generally, when rates are low, inflation tends to rise. As we have seen with last year’s record-breaking real estate activity paired with concerning amounts of inflation which continue into 2022. Following a 31-year high headline inflation rate of 6.8% and a 32-year high core inflation rate of 4.23% in April, the Bank of Canada is widely expected to continue its aggressive rate hike schedule.

The increase in global inflation is occurring as the global economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022. US labour market strength continues, with wage pressures intensifying. Global financial conditions have tightened and markets have been volatile.

Takeaway:

The Bank of Canada couldn’t be more forthright. The concluding paragraph of the policy statement is as follows: “With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further. The policy interest rate remains the Bank’s primary monetary policy instrument, with quantitative tightening acting as a complementary tool. Efforts to meet the Bank’s 2% inflation target will be guided by the Bank’s assessment of the economy and inflation. The Governing Council is prepared to act more forcefully if necessary.

The Bank of Canada has told us we should expect at least another 50 bps rate hike on July 13. It could even be 75 bps if inflation shows no sign of decelerating. The Bank estimates that the overnight rate’s neutral (non-inflationary) level is  2%-to-3%. Traders currently expect the policy rate to end the year at roughly 3%. 

This was a very hawkish policy statement. The central bank is defending its credibility and will undoubtedly continue to tighten monetary policy aggressively.

Courtesty of Darcy Doyle at The Mortgage Professionals.

Contact Darcy Doyle at the Mortgage Professionals  604-889-7343 or send an email at [email protected]