Bank of Canada raises interest rate and continues quantitative tightening

In a scheduled announcement on July 12, 2023, the Bank of Canada decided to raise its target for the overnight lending rate by 25 basis points to 5%. This move was more widely expected than the June rate hike.

Perhaps most importantly for gauging the impact on the housing market, the statement accompanying the decision made no indication there would now be a pause, and the next decision is not until September.

The recent resumption of policy tightening will likely rekindle the kind of uncertainty seen throughout 2022 and shift a number of prospective buyers and sellers back to the sidelines this summer.

The main reasons cited by the Bank for choosing to raise rates again in July were:

• Persistent excess demand, with Canadians continuing to spend money at higher-than-expected levels, and
• Sticky core inflation which hasn’t moved much for months despite welcome slowing at the overall headline inflation level.

The Bank noted a number of the positive inflation prints this year have simply been due to lower energy prices, not from disinflation in prices for things like groceries and other goods and services, which is what the Bank is really trying to get under control.

With the low hanging fruit of those big base effects from past energy price movements now more than a year in the rear-view mirror, further progress on bringing down year-over-year inflation will have to come from the real thing.

The Bank said it expects Canadian economic growth to slow over the next year, averaging around 1% through the second half of this year and the first half of next year—in other words not a recession, but hopefully slow enough to get inflation moving in the right direction.

Th issue there is the Bank now forecasts year-over-year Consumer Price Index (CPI) inflation to get suck at 3% (it’s currently 3.4%) for the next year, before slowly easing back to their 2% target by mid-2025—two years from now.

This path back to target is slower and further out than previous forecasts and will reinforce the growing consensus that rates won’t just be higher than many thought, which they now are, but for longer as well. Governing Council said it remains concerned slow progress could get stalled for even longer.

The Bank of Canada’s next scheduled interest rate announcement will be on September 6, 2023, leaving almost two months for it to assess new incoming data. You may recall after the April rate announcement, many thought there would be rate cuts in the second half of this year, so a lot can change in a short time.