CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 81.40% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

Scan to Download iOS&Android APP

Bank of Canada interest rate hike: When will BoC raise rates again?


Updated

Share this article
Tags

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
Bank of Canada building in Ottawa
Will Bank of Canada raise rates again? – Photo: WorldStock/Shutterstock

Bank of Canada (BoC) hiked its key interest rate by 75 basis points (bps) during 7 September’s meeting, a lower increment following a surprising full percentage point interest rate hike in July to curb four-decades high inflation.

Inflation cooled in July to below the bank’s expectations. Canada’s economy expanded for the fourth consecutive quarter. The labour market remained tight with a record-low unemployment rate.

As the central bank is scheduled to have two more interest rate meetings this year, will BoC hike interest rates again and by how much?

We take a look at the Bank of Canada’s interest rate history, factors that have affected the decision by BoC to raise rate over the years, and the most recent forecasts for the central bank’s monetary policy. 

What is the Bank of Canada?

Founded in 1934, Bank of Canada is Canada’s central bank. In the early 1930s Canada was mostly rural and underpopulated, which is why having a central bank didn’t seem to be a necessity.

The Great Depression fuelled change in Canada’s banking system. The country’s unemployment rate rose to 20% in the winter of 1933 as businesses laid off workers.

Similarly to other central banks, the Bank of Canada’s responsibilities are:

  • Keeping inflation at the 2% target using the monetary policy framework.

  • Promoting safe and efficient financial systems within Canada and abroad, as well as conducting transactions in financial markets to support these objectives.

  • Designing, issuing and distributing Canadian banknotes.

  • Management of public debt programs and foreign exchange reserves as the fiscal agent of the Government of Canada.

  • Supervision of payment service providers.

The Bank is led by the policy-making Governing Council whose key responsibility is conducting monetary policy to keep inflation in check. The Executive Council, which consists of the Governing Council and the chief operating officer, oversee the Bank’s strategy. 

For conducting monetary policy, the Governing Council’s main tool is the overnight rate, the key Bank of Canada interest rate, or policy rate. The Governing Council normally sets the rate on eight fixed announcement dates a year. 

The Council makes interest rate decisions by consensus rather than through individual votes, as some other central banks do.

What is your sentiment on USD/CAD?

1.38303
Bullish
or
Bearish
Vote to see Traders sentiment!

Bank of Canada interest rate history

In 2018, the bank decided on three rate hikes of 25bp each, with the most recent hike on 24 October raising the interest rate in Canada from 1.50% to 1.75%. In that period, the Bank of Canada rate hikes came amid solid global economic growth in Canada and the neighbouring US. 

In addition, the new US-Mexico-Canada Agreement (USMCA), which replaced 1994’s North American Free Trade Agreement (NAFTA), was expected to reduce trade uncertainty that had curbed business confidence and investment, the bank said in the statement. 

The bank kept the rate at 1.75% over 2019, citing concerns about slowing global economic growth and intensifying trade war between the US and China weighing on global demand and commodity prices. 

Bank of Canada key interest rate, 2014 - 2022

In 2020, the Bank of Canada had three interest rate cuts of 50bp each to help the economy during Covid-19 restrictions. This brought the Bank of Canada interest rate to 0.25%. Canada’s economy declined by 5.5%, and inflation was below the 2% target during 2020. 

The bank kept its key rate at 0.25% well until the first quarter of 2022. 

On 3 March 2022, the Bank of Canada started increasing interest rates, first by 25bps to 0.50%, as inflation started to soar due to the impact of the Russian invasion of Ukraine on energy and commodity prices. It was the first Bank of Canada interest rate hike since October 2018. 

The Consumer Price Index (CPI) annual inflation was recorded at 5.1% at the time of the rate hike announcement on 3 March, and the country’s economy grew by 6.7% in the fourth quarter of 2021, according to the bank.

USD/JPY

144.77 Price
+0.260% 1D Chg, %
Long position overnight fee 0.0036%
Short position overnight fee -0.0106%
Overnight fee time 21:00 (UTC)
Spread 0.040

GBP/USD

1.12 Price
+0.320% 1D Chg, %
Long position overnight fee -0.0038%
Short position overnight fee 0.0001%
Overnight fee time 21:00 (UTC)
Spread 0.00060

EUR/USD

0.98 Price
-0.150% 1D Chg, %
Long position overnight fee -0.0086%
Short position overnight fee 0.0025%
Overnight fee time 21:00 (UTC)
Spread 0.00024

GBP/JPY

161.66 Price
+0.560% 1D Chg, %
Long position overnight fee 0.0000%
Short position overnight fee -0.0000%
Overnight fee time 21:00 (UTC)
Spread 0.100

In line with other central banks, such as the neighbouring US Federal Reserve (Fed) and the Bank of England (BoE), Canada’s central bank continued the monetary tightening cycle, hiking the rates five times so far in 2022.

Soaring inflation projected to ease

Statistics Canada revealed in August that annual inflation stood at 7.6% in July, easing from a peak of 8.1% in June as the annual growth of gasoline prices decelerated. In July, gasoline prices rose 35.6% year on year, slowing from a 54.6% increase in June. Consumers paid 9.2% less for the commodity in July compared with June, which represented the largest monthly drop since April 2020.

The inflation reading for July was below the 8% rate that Bank of Canada expected in the third quarter of 2022. The central bank estimated the inflation rate to slow to 7.5% in the fourth quarter this year, and fall to 3.2% in the same period of 2023, and 2% in 2024 as global price pressures and domestic demand ease. 

“Global factors remain the largest drivers. These include Russia’s invasion of Ukraine, which has further pushed up food and gasoline prices. As well, tradable goods prices, including high freight costs, continue to put pressure on global costs,” the bank said in its July Monetary Policy Report.

TD Economics forecast Canada’s CPI to average 6.7% in 2022 and ease to 3.5% in 2023 as of their latest forecast in June. Meanwhile, the Dutch lender ING Group estimated Canada’s annual inflation to average 7% in 2022, falling to 3.1% in 2023 and 1.8% in 2024, as of 5 September.

Economic growth to slow amid tightening cycle

The Bank of Canada forecast the country’s economic growth to slow to 2% in the third quarter of this year, from 4% in the second quarter. 

“Consumption growth moderates as the boost from pent-up demand for in-person services eases. High inflation is also squeezing household budgets, and rising interest rates are increasing the cost to finance purchases of big-ticket items and making savings more attractive,” the bank said in the report.

The Canadian central bank expected the country’s economy to grow by 3.5% in 2022, slowing to 1.75% in 2023, and 2.50% in 2024, explaining the declining growth by the policy tightening necessary to combat inflation.  

“Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures,” the bank said in its statement, adding that it estimated global energy prices to decline.

TD Economics forecast Canada’s economy to slow to 1.6% in the fourth quarter of this year, from 3% in the third quarter. Overall, their analysts expected the economy to grow by average 3.7% in 2022, slowing to 1.7% in 2023.

ING Group also projected Canadian economic growth to ease to 2.8% in the fourth quarter 2022, from 3.9% in the third quarter. For 2022, ING forecast 3.6% growth on average. Canada’s economy was estimated to slow to 1.5% in 2023, before recovering to 1.9% in 2024.

Unemployment stays at record low

The unemployment rate in Canada was steady at 4.9% in July, matching the historic low reached in June, Statistics Canada reported.

“Labour markets are tight with a record low unemployment rate, widespread labour shortages, and increasing wage pressures. With strong demand, businesses are passing on higher input and labour costs by raising prices,” the bank said at its July policy meeting.

TD Economics estimated Canada’s unemployment rate to average 5.3% in 2022, down from 7.4% in 2021. The rate was then expected to accelerate to 5.8% in 2023, according to its forecast

Bank of Canada interest rate forecast for 2022 and beyond

On 7 September, ING expected BoC to have a further 75bp of hikes, taking the policy rate to 4% which the Dutch lender believed it would be the peak.

“A deteriorating global outlook and signs of weakness in the housing market, which will be intensified by additional rate hikes, are likely to lead to a slowdown in Canadian economic activity. With inflation also expected to gradually subside through 2023, we are looking for BoC rate cuts in late 2023,” ING’s economist James Knightley and Francesco Pesole wrote on 7 September.

ING forecast BoC to have a further 75bp of hikes, bringing the overnight rate to 4% in the fourth quarter of 2022, dropping to 3.75% in the third quarter and 3.25% in the fourth quarter of 2023. It predicted that the BoC would keep lowering the policy rate, reaching 2.75% in the first quarter and 2.5% in the fourth quarter of 2024.

TD Economics expected the Bank of Canada would opt for between 50 to 75bp rate hike in September meeting. It forecast the Canadian interest rate to rise from 3% in the third quarter of this year to 3.25% in the fourth quarter and maintain the level until the end of 2023.      

Analysts did not offer the long-term forecasts on Bank of Canada interest rate rise due to the complex nature of such estimates. 

The bottom line

Analysts mentioned in this article predicted that the BoC will increase rates until December but at a less aggressive pace to curb the rising inflation. However, analysts expected the bank to pause rate hikes as high interest rates begin to affect economic growth rate.

Remember that analyst predictions can be wrong. Kindly conduct your own due diligence before trading. Note that past performance does not guarantee future returns. And never trade money that you cannot afford to lose.

FAQs

When will interest rates rise in Canada?

Bank of Canada is expected to increase its rates in the last two meetings of this year, on 26 October and 7 December.

How high will the Bank of Canada’s interest rate go?

As of 5 September, ING forecasts the Bank of Canada to hike its rate to 4% in the fourth quarter of 2022 and keep it until the second quarter 2023. The bank was expected to start cutting rates to 3.75% in the third quarter of 2023 until it reaches 2.50% in the fourth quarter of 2024.

Meanwhile, TD Economics forecasts the Canadian interest rate to rise from 3% in the third quarter of this year to 3.25% in the fourth quarter and maintain the level until the end of 2023. Remember that analysts’ predictions can be wrong and shouldn’t be used as a substitute for your own research.

Will the Bank of Canada raise interest rates?

ING expected the Bank of Canada to follow in the Fed’s footsteps with a less aggressive rate hike of 75bps in the last quarter of this year. Note that analyst predictions can be wrong and shouldn’t be used as a substitute for your own research. Always make sure to conduct your own due diligence before making any investment or trading decisions.

Further reading:

What You Need to Know

The week ahead update on major market events in your inbox every week. Subscribe
The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
Capital Com is an execution-only service provider. The material provided on this website is for information purposes only and should not be understood as an investment advice. Any opinion that may be provided on this page does not constitute a recommendation by Capital Com or its agents. We do not make any representations or warranty on the accuracy or completeness of the information that is provided on this page. If you rely on the information on this page then you do so entirely on your own risk.

Still looking for a broker you can trust?

Join the 450.000+ traders worldwide that chose to trade with Capital.com

1. Create & verify your account 2. Make your first deposit 3. You’re all set. Start trading