In a move that shocked nobody, the Bank of Canada held interest rates steady at five per cent on Wednesday, due to lessening economic activity. Several factors were behind this decision, and we may anticipate future adjustments.
What prompted the Bank of Canada’s decision to maintain its key rate?
A combination of evidence suggesting dampening demand in the economy, such as labour market, inflation, and GDP reports, provoked this verdict. The central bank relies on a delayed effect monetary policy. Consequently, they have decided to leave the rate untouched, judging that the influence of previous rate increases will progressively permeate through the economy, decelerating it further.
The central bank perceives the existing interest rates to be restrictive enough to exert a downward pressure on economic growth and inflation over time, according to an analysis by RBC assistant chief economist Nathan Janzen.
Inflation has toned down compared to its peak the previous year, relaxingly cooling to 3.3 per cent in July, with the bank’s target in sight at two per cent.
Simultaneously, Canada recorded a second-quarter GDP reduction, accompanying an unemployment rate climbing for three successive months.
What of mortgage renewals?
Fixed-rate mortgage holders have closely observed the key rate escalation, persistently paying the unvarying lower rate of their initial contract. However, the dramatic increase facing them upon contract renewal is inevitable, as the bank has raised the rate ten times since March 2022.
Should one be locked in a variable-rate mortgage with fixed payments, the amortization period’s elongation may seem ominous; however, the eventual renewal will encounter significantly escalated rates.
Variable-rate mortgages with fluctuating payments, on the other hand, yield no surprises; already succumbing to the ascending payment rates due to the central bank’s regular hikes, the new higher rates upon renewal will not be unexpected.
Will there be further hikes in the interest rates?
The potentiality for future hikes remains, with the bank’s keen eye on economic data. Should indicators like GDP or inflation begin to flare up again, additional hikes could be in the offing.
According to TD senior economist James Orlando, the current rough patch of economic growth may prevail up until early 2024. However, it is unlikely the central bank will confirm an end to rate hikes.
Despite the enduring slowdown, another hike remains a possibility, provided that the standard for its necessity is amped up.
Despite interest rate ascension curbing inflation, why is the Consumer Price Index maintaining its high levels?
The effects of interest-rate hikes by the Bank of Canada are not instantaneous but instead play a slow-paced, long game, potentially lasting several months or even up to a couple of years. As summer advances, the impacts are becoming increasingly apparent, though they are not fully realized yet.
Inflation, including fluctuating factors such as gas and food prices, susceptible to global incidents like warfare and climate changes, and high shelter costs because of high rates, have all contributed to the Consumer Price Index’s persistence.
Future trends predict an incline in gas prices, hinting towards a probable higher figure for the Consumer Price Index, according to the central bank.
When should we anticipate a decline in interest rates?
Markets have been wrangling with this question throughout the year. Expectations of potential rate cuts by the end of 2023 have faded as the year proceeded.
The Bank of Canada refrained from alluding to rate reductions to avoid stirring hope. Inflationary pressures are still at play and the battle against them is far from over, per the announcement made by the bank on Thursday.
Interestingly, the word “pause”, let alone the term “cut”, was not even used in the bank’s statement. Avery Shenfeld, chief economist at CIBC Capital Markets, suggests the apex of this rising cycle will be the five per cent rate.
“All signs from the central bank suggest we are far from any discussion about rate cuts,” says Shenfeld.