The Bank of Canada 5% Rate Hold

The Bank of Canada 5% Rate Hold at a Glance

The Bank of Canada has decided to keep interest rates unchanged for the second time in a row but expressed ongoing concerns about inflation risks and price pressures. The overnight target rate remains at 5.00%, and the Bank acknowledged that monetary policy is effectively curbing spending and alleviating price pressures, but it still wishes to see faster progress.

The Bank’s worries about slow progress towards price stability and increased inflation risks were also expressed, stating that it is prepared to raise the policy rate further if necessary. GDP growth forecasts were revised, and inflation forecasts were adjusted upward by the Bank. Despite today’s rate hold, more households will face higher interest rates and monthly payments as their mortgages come up for renewal.

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The Details of The 5% Rate Hold From Bank of Canada

The Bank of Canada made its anticipated decision to keep interest rates unchanged for the second time in a row today. However, the Bank expressed its ongoing concerns about inflation risks and price pressures.

As expected, the overnight target rate remained at 5.00%, meaning variable-rate mortgage borrowers will continue to face a prime rate of 7.20%.

In its statement, the Bank acknowledged that monetary policy is effectively curbing spending and alleviating price pressures, but it still wishes to see faster progress.

The statement continued to express the Bank’s worries about slow progress towards price stability and increased inflation risks, stating that it is prepared to raise the policy rate further if necessary.

Although improvements have been observed in inflation and underlying demand, economists believe it is too early for the Bank to relax its vigilant stance.

BMO’s Douglas Porter commented that price and wage growth are still too high for the Bank of Canada to veer from its hawkish rhetoric. Porter expects the Bank to maintain its current position until deep into 2024, especially without a significant rebound in growth, a surge in inflation, or a considerably weaker Canadian dollar.

TD Economics’ James Orlando agrees that the Bank of Canada is likely to keep its hawkish bias to achieve the projected economic slowdown. He noted that the Bank’s rhetoric has influenced a longer duration for its policy rate.

Consequently, the Government of Canada 10-year bond yield has reached its highest level since 2007.

GDP growth forecasts were also revised by the Bank of Canada in today’s decision, as the previous rate hikes’ effects begin to take hold. The Bank now estimates an average economic growth of around 1% for this year and next before gaining momentum again in 2025.

Inflation forecasts, on the other hand, have been adjusted upward by the Bank. Mortgage interest costs and high inflation in rent and housing expenses, along with slower normalization of near-term inflation expectations and corporate pricing behavior, have contributed to the upward revision. Core inflation measures show minimal downward movement.

Regarding household finances, despite today’s rate hold, more households will face higher interest rates and monthly payments as their mortgages come up for renewal. This is expected to impact activity and mitigate price pressures, possibly leading to rate cuts in mid-2024.

The Bank also acknowledged the impact of higher rates on overall household financial health. Measures of household financial stress have risen from pandemic lows as interest rates have increased. Non-mortgage holders are particularly affected by indicators of financial stress, and delinquency rates for various credit products, including auto loans, have increased.

The next rate decision from BoC will be held on December 6, 2023.

Wrap Up

The Bank of Canada has decided to keep interest rates unchanged for the second consecutive time. However, the Bank remains concerned about inflation risks and price pressures. The overnight target rate will remain at 5.00%, resulting in a prime rate of 7.20% for variable-rate mortgage borrowers. The Bank believes that monetary policy is effectively curbing spending and alleviating price pressures but would like to see faster progress. It continues to worry about slow progress towards price stability and increased inflation risks and is prepared to raise the policy rate further if necessary.

Economists do not expect the Bank to relax its vigilant stance, as price and wage growth are still too high. The Bank’s hawkish rhetoric has influenced a longer duration for its policy rate, leading to the highest level of the Government of Canada’s 10-year bond yield since 2007.

The Bank has revised its GDP growth forecasts and now estimates an average economic growth of around 1% for this year and next. Inflation forecasts have been adjusted upward due to various factors, including mortgage interest costs, high inflation in rent and housing expenses, and slower normalization of near-term inflation expectations and corporate pricing behavior.

Despite the rate hold, more households will face higher interest rates and monthly payments as their mortgages come up for renewal, impacting activity and possibly leading to rate cuts in mid-2024. The Bank has also acknowledged the impact of higher rates on household financial health, with measures of household financial stress rising and delinquency rates increasing for various credit products. The Bank’s next rate decision is scheduled for December 6, 2023.

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