In a move that comes as no surprise to industry analysts, the Bank of Canada has hiked its overnight interest rate by 0.25% to 5% on July 12th, 2023. The increase, which is part of an ongoing policy of quantitative tightening, was triggered by "an accumulation of evidence" highlighting the persistence of excess demand and elevated core inflation.
This marks the tenth interest rate hike by the Bank since March 2022 and is expected to lead to banks raising their prime rates to 7.20%. The policy shift, while expected, has sparked concern among observers and is likely to have an immediate impact on variable mortgage rates.
The Bank's decision was informed by several factors, including a Canadian economy that is demonstrating greater resilience than expected. Despite predictions of consumer spending slowing down due to successive increases in interest rates, recent retail trade data indicates that excess demand remains persistent.
A significant problem is the housing market. More people want to buy houses than there are houses for sale. This imbalance is causing house prices to rise. While there seem to be more workers available for jobs, the job market is still strained, and wages have grown by 4-5%.
The Bank also noted the impact of strong population growth, primarily driven by immigration. While immigrants are helping to alleviate the worker shortage, they are simultaneously boosting consumer spending and increasing housing demand.
Several factors played into the Bank's decision. First, Canada's economy is doing better than expected. Even though it was thought people might start to spend less because of increasing interest rates, it turns out demand is still strong.
The Bank also mentioned the influence of rapid population growth, mostly due to immigration. Immigrants are filling some job vacancies, but they're also buying stuff and looking for houses, which increases demand.
The Bank of Canada has said it will continue to monitor changes in core inflation and future inflation prospects. This suggests they might adjust the interest rate again in the future, depending on how the economy is doing.