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

By Fitri Wulandari

Edited by Jekaterina Drozdovica


Updated

Bank of Canada building in Ottawa
Will Bank of Canada raise rates again? – Photo: WorldStock/Shutterstock

The Bank of Canada (BoC) opted to hike its key interest rate by 50 basis points (bps) at 7 December’s meeting, double analysts’ expectations of a doveish 25bps rise.

The pace of the rate hike, however, has slowed from a surprising full percentage point interest rate hike in July to curb four-decades high inflation.

Inflation has fallen to 6.9% in October from June’s peak of 8.1%, but remains above the bank’s target of 2%. Canada’s economy expanded at a slower rate in the third quarter. The labour market remained tight in November, but it has risen from a record-low unemployment rate in June-July.

As the central bank is scheduled to have its first rate meeting for 2023 in January 2023, 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, the 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.

As with 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 programmes 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, oversees the Bank’s strategy. 

The Governing Council’s main tool for implementing monetary policy 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 with some other central banks.

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 the 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% 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.

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, and has hiked the rates seven times since it started the tigthening cycle in March 2022.

Soaring inflation projected to ease

Statistics Canada announced in November that annual inflation stood at 6.9% in October, matching September’s level on higher fuel prices and mortgage costs. It has fallen from a peak of 8.1% in June as the rate of increase in food prices has slowed, the agency revealed.

Bank of Canada expected inflation to continue to fall, reaching 3% by the end of 2023 and returning to the 2% target by the end of 2024.

The decrease in inflation occurs as higher interest rates in Canada and abroad continue to work their way through the economy, and the impact of global supply disruptions fades,” the bank said in its October Monetary Policy Report.

TD Economics forecast Canada’s CPI to average 6.9% in 2022 and ease to 3.8% in 2023 in its September forecast. Meanwhile, the Dutch lender ING Group estimated Canada’s annual inflation would fall to average 3.1% in 2023, from 6.7% in 2022. The country’s inflation was expected to drop to 1.9% in 2024, before accelerating 2.2% in 2025, according to the bank’s latest forecast as of 16 November.

Scotiabank projected inflation would decelerate to 4% in 2023, from an average of 6.8% in 2022, and return to the Bank of Canada’s 2% target in 2024.

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“Much of the reduction in inflation stems from a reversal of the global factors that have pushed inflation up in Canada and elsewhere. These factors (largely commodity prices and supply bottlenecks) have mostly unwound the gains made over the last year and appear to be slowly working their way through to inflation. That is expected to continue,” Jean-François Perrault, Scotiabank’s chief economist wrote on 6 December.

Economic growth to slow amid tightening cycle

Canada’s gross domestic products (GDP) grew at an annual rate of 2.9% in the July to September quarter of 2022, slowing from 3.2% in the second quarter and 5.8% in the third quarter of 2021, according to Statistics Canada.

“GDP growth in the third quarter was stronger than expected, and the economy continued to operate in excess demand. Canada’s labour market remains tight, with unemployment near historic lows. While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline,” Bank of Canada said in the statement on 7 December.

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 as a result of 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 would decline.

BoC forecast the country’s economic growth would slow to just under 1% in 2023 from 3.25% in 2022. Growth was expected to tick up to 2% as the impact of higher interest rates on Canadian growth fades, potential output growth picks up and foreign demand stabilises.

TD Economics forecast Canada’s real gross domestic products (GDP) to slow to 1% in the fourth quarter of this year from 1.6% in the third quarter. Overall, its analysts expected the economy to grow by average 3.3% in 2022, slowing to 0.9% in 2023 and recovering to 1% in 2024

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. Growth was expected to slow to 1.5% in 2023 before recovering to 1.9% in 2024.

Unemployment rate rising

The unemployment rate in Canada declined 0.1% to 5.1 in November,  the second fall in three months and edging closer to record low of 4.9% in June and July, Statistics Canada reported.

The average hourly wages grew by 5.6% in November year-over-year (YoY). It remained above 5% for six consecutive month.

Analysts at Bank of America (BofA) Global Research wrote on 2 December: 

“We continue to expect unemployment rate to increase in the following months as the lagged impact of higher interest rates materialise.”

TD Economics estimated Canada’s unemployment rate would average 5.4% in 2022. The rate was then expected to accelerate to 6.1% in 2023 and 6.5% in 2024, according to its forecast.

“Though we haven’t seen it in the labour market data as of yet, the impact of the BoC’s aggressive moves will eventually cool the labour market. With the recent momentum, this is expected to take pace in mid to late 2023,” it said.

Can bigger rate hike support Loonie?

The Canadian dollar, also known as the Loonie, has been under pressure from the stronger greenback (USD/CAD) as the US Federal Reserve (Fed) has maintained its aggressive tightening stance.  

As of 8 December the USD/CAD currency pair was trading at 1.367, gaining 7.56% YoY, reflecting the stronger US dollar.

ING Group’s chief international economist James Knightley and FX Strategist Francesco Pesole wrote on 7 December:

“Despite the larger-than-expected rate hike, USD/CAD has struggled to move below 1.3600, which is due to a) the more doveish tone in the statement around the future path of rate increases; and b) an external environment that remains largely unsupportive for CAD.”

Crude oil prices falling to below $80 a barrel was weighing down the Loonie, Knightley and Pesole said.  In a note on 6 December, they expected USD/CAD to end 2022 around 1.37 as the USD strengthening is partly offset by a potential recovery in oil prices.

“Looking at next year, we continue to favour the loonie over other pro-cyclical currencies, given more limited exposure to China and Europe’s economic woes,” they said.

Bank of Canada interest rate forecast for 2023 and beyond

ING’s Bank of Canada interest rate forecast expected the overnight rate to stand at 4.50% in the first quarter of 2023, up from 4.25% in the final quarter of 2022. It forecast BoC would hold the rate in the second quarter of 2023, before lowering it by 50bps each quarter, starting in the third quarter. The rate cut would lower the overnight rate to 3% in the first quarter of 2024 and 2.5% in the fourth quarter.

Canada would raise interest rates to 3% in the final quarter of 2025, according to the Dutch lender.

Bank of Canada interest-rate predictions from Scotiabank projected the overnight rate would be lowered to 4% by the end of 2023 and 3% in 2024, from 4.25% by the end of 2022, as of 4 November.

TD Economics expects the Bank of Canada to pause interest rate hikes after the December 2022 rate increase, keeping the overnight rate at 4.25% until the third quarter of 2023. It forecast the Canadian interest rate would drop to 3.25% in the fourth quarter of 2023. 

For the long-term forecasts on Bank of Canada interest rate rise, TD Economics projected the overnight rate would stay at 1.75% from the end of  2024 to the end of 2028.

The bottom line

Analysts mentioned in this article predicted that the BoC may increase rates until the first quarter of 2023 but at a less aggressive pace to curb the rising inflation. However, analysts expect the bank to pause rate hikes as high interest rates begin to affect economic growth rate.

Remember that analysts’ predictions can be wrong. You should always 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?

The Bank of Canada is expected to increase its rates in a lower increment in the first rate meeting in January 2023.

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

As of 16 November,  ING’s Bank of Canada interest-rate forecast expected the overnight rate to stand at 4.50% in the first quarter of 2023, up from 4.25% in the final quarter of 2022, before being cut in the following quarters.

Meanwhile, TD Economics forecasts the Canadian interest-rate rises to pause after the December 2022 rate meeting, keeping the overnight rate at 4.25% until the third quarter of 2023. It forecast the Canadian interest rate would drop to 3.25% in the fourth quarter of 2023. 

Will the Bank of Canada raise interest rates?

ING expected the Bank of Canada to increase its overnight rate in the first quarter of 2023 but at a lower increment. Note that analysts’ predictions can be wrong and shouldn’t be used as a substitute for your own research. Always conduct your own due diligence before making any investment or trading decisions.

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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.
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