Financial Post Staff - 4h ago
The Bank of Canada building in Ottawa.© Provided by Financial Post
Here’s the official statement from the Bank of Canada’s interest rate decision on Wednesday, Sept. 7, 2022:
The Bank of Canada today increased its target for the overnight rate to 3.25 per cent, with the Bank Rate at 3.50 per cent and the deposit rate at 3.25 per cent. The Bank is also continuing its policy of quantitative tightening.
The global and Canadian economies are evolving broadly in line with the Bank’s July projection. The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.
Global inflation remains high and measures of core inflation are moving up in most countries. In response, central banks around the world continue to tighten monetary policy. Economic activity in the United States has moderated, although the U.S. labour market remains tight. China is facing ongoing challenges from COVID shutdowns. Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen.
In Canada, CPI inflation eased in July to 7.6 per cent from 8.1 per cent because of a drop in gasoline prices. However, inflation excluding gasoline increased and data indicate a further broadening of price pressures, particularly in services. The Bank’s core measures of inflation continued to move up, ranging from 5 per cent to 5.5 per cent in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.
The Canadian economy continues to operate in excess demand and labour markets remain tight. Canada’s GDP grew by 3.3 per cent in the second quarter. While this was somewhat weaker than the Bank had projected, indicators of domestic demand were very strong — consumption grew by about 9.5 per cent and business investment was up by close to 12 per cent. With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic. The Bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.
Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2 per cent inflation target.
Information note
The next scheduled date for announcing the overnight rate target is Oct. 26, 2022. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR at the same time.
Bank of Canada’s Delayed Action Means A Hard Landing Is Most Likely: Oxford Econ
SEPTEMBER 7, 2022
Canada’s central bank made its expected rate hike, but the market was still shocked. The Bank of Canada (BoC) hiked the policy rate to 3.25 points today, up 0.75 points from the previous level. Interest rates are now at the highest rate since 2008, and expected to keep climbing due to inflation. Consequently, a hard landing, or recession, is now expected and the odds are against it being a mild one.
The Neutral Policy Rate
For any of this to make sense, you need to understand the basics of policy interest rates. The central bank’s primary role is to ensure low and stable inflation. They do this with one big tool — the policy interest rate.
Central banks have an ideal target range of interest, with the BoC using between 1 and 3 points. If inflation is below 1 point, the BoC might lower rates to make credit cheaper. By doing so, they’re encouraging banks to make more loans to drive inflation, and thus prices higher. That’s where the inflation comes from.
If inflation is above 3 points, they’ll hike rates to cool down the incentive to borrow. This will lower the amount of demand, helping to bring prices down. That’s how they cool inflation — by cooling demand.
The neutral policy rate is the level where interest rates have no influence on inflation. It doesn’t drive inflation or slow it, it’s just right for the level of inflation. You’re going to miss these days, we can already tell.
Here’s the important part for today — BoC research shows it takes 18 to 24 months for policy to arrive to market. If the BoC wanted stable inflation, it was supposed to do it more than two years ago to get the ball rolling. Instead of coming down in a graceful landing, we’re slamming the shifters down, then up, then… you get it. Trying to force something is almost always worse than encouraging it, but at this point the BoC is stuck. This is a key point to understand the information below.
Canada To Face A Moderate Recession
The BoC is signaling the economy is way overheated, to the point it can be destabilizing to the public. “Today’s statement makes clear that with the economy operating in excess demand, tight labour markets and still elevated inflation, the BoC will press forward with further rate hikes despite its forecast for the economy to “moderate” in H2,” said Tony Stillo, a director of Oxford Economics that specializes in the Canadian economy.
Stillo is no longer entertaining fantasies of a mild recession, like some banks. “In our view, Canada is now likely to fall into a moderate recession by late 2022,” he adds.
The primary cause, according to the economist, is aggressive monetary policy. By trying to correct inflation in a short period, they need to apply much more pressure than usual. Canada’s highly indebted households amplify the pain in this emergency landing.
He mentions the “deepening housing correction already underway,” compounding the pain further. Add to that, a global slowdown is fast approaching as well, leading to unknown fallout.
Bank of Canada Expected To Hike Further
Stillo sees the BoC hiking even further in October, bringing the policy rate to 3.75% in just a few months. “From there, we expect mounting signs of a recession in Canada, weakening external demand and continued declines in inflation will cause the Bank of Canada to halt rate hikes,” he says.
“We now think that such rapid tightening of monetary policy given Canada’s a highly interest sensitive economy, along with a deteriorating external environment, make a recession the most likely outcome for the economy.”
Waiting too long to act on inflation put the central bank in a tough position. Canada is now witnessing some of the highest inflation ever. A whole generation hasn’t seen anything even close to this.
Had the central bank tackled inflation when it claimed it was transitory, it would be a different story. However, as the BIS pointed out, central banks repeated policy mistakes around the world. This led to synchronization, which leads to larger risk events. Now we’re starting to see why households being highly indebted in a synchronization event is a disaster waiting to happen.
Canadians vulnerable to 'payment shock' as debt, interest rates climb, experts say
Canadians are increasingly vulnerable to "payment shock" as higher household debt levels collide with oversized interest rate hikes.
The Bank of Canada raised its key lending rate by three-quarters of a percentage point Wednesday, making it more expensive to borrow money in a time of climbing debt.
It's a situation experts say could push some to a breaking point as they rely on higher interest rate loans and credit cards to pay for the soaring cost of everyday essentials.
Wes Cowan, a licensed insolvency trustee and senior vice-president at MNP Ltd., says people are increasingly using credit cards and loans to make ends meet.
He says given growing debt levels and escalating interest rates, he expects to see more people struggle to make minimum debt servicing payments in the coming months.
2:33
Canadians turning to credit cards for financial stress relief
Canadians are increasingly vulnerable to "payment shock" as higher household debt levels collide with oversized interest rate hikes.
The Bank of Canada raised its key lending rate by three-quarters of a percentage point Wednesday, making it more expensive to borrow money in a time of climbing debt.
It's a situation experts say could push some to a breaking point as they rely on higher interest rate loans and credit cards to pay for the soaring cost of everyday essentials.
Wes Cowan, a licensed insolvency trustee and senior vice-president at MNP Ltd., says people are increasingly using credit cards and loans to make ends meet.
He says given growing debt levels and escalating interest rates, he expects to see more people struggle to make minimum debt servicing payments in the coming months.
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Canadians turning to credit cards for financial stress relief
cbc.ca
4:46
BOC's big rate hike not the end, says economist cbc.ca
Meridian Credit Union senior wealth advisor Paul Shelestowsky says the risk of payment shock is front and centre as people grapple with the confluence of high inflation and high interest rates.
"Anything that has a variable rate attached to it, like the lines of credit, we're going to see a huge payment shock," he says. "Everything is more expensive — buying groceries, heating your home, the basics — and now servicing your debt will cost more too."
Credit reporting agencies Equifax Canada and TransUnion Canada both released reports this week highlighting the recent growth in household debt.
Equifax said total consumer debt climbed 8.2 per cent in the second quarter of 2022 compared with the same quarter last year.
Meanwhile, TransUnion's latest credit industry report said total debt grew to an all-time high at $2.24 trillion, up 9.2 per cent from the same time in 2021 and up 16.4 per cent from pre-pandemic levels at the end of 2019.
The agency also said credit card balances and the risk of consumer delinquency on personal loans has also increased.
This report by The Canadian Press was first published Sept. 7, 2022.
4:46
BOC's big rate hike not the end, says economist cbc.ca
Meridian Credit Union senior wealth advisor Paul Shelestowsky says the risk of payment shock is front and centre as people grapple with the confluence of high inflation and high interest rates.
"Anything that has a variable rate attached to it, like the lines of credit, we're going to see a huge payment shock," he says. "Everything is more expensive — buying groceries, heating your home, the basics — and now servicing your debt will cost more too."
Credit reporting agencies Equifax Canada and TransUnion Canada both released reports this week highlighting the recent growth in household debt.
Equifax said total consumer debt climbed 8.2 per cent in the second quarter of 2022 compared with the same quarter last year.
Meanwhile, TransUnion's latest credit industry report said total debt grew to an all-time high at $2.24 trillion, up 9.2 per cent from the same time in 2021 and up 16.4 per cent from pre-pandemic levels at the end of 2019.
The agency also said credit card balances and the risk of consumer delinquency on personal loans has also increased.
This report by The Canadian Press was first published Sept. 7, 2022.
Bank of Canada lifts rates to 14-year high, keeps door open on more tightening
By Julie Gordon and David Ljunggren - Yesterday
OTTAWA (Reuters) - The Bank of Canada hiked interest rates to their highest level in 14 years on Wednesday, as expected, and signaled its most aggressive tightening campaign in decades was not yet done as it battles to tame inflation.
The central bank, in a regular rate decision, hiked its policy rate to 3.25% from 2.50%, matching analyst forecasts and hitting a level not seen since April 2008. Rates are now above the BoC's neutral range, meaning that for the first time in about two decades monetary policy is likely to restrict growth.
"Given the outlook for inflation, the Governing Council still judges the policy interest rate will need to rise further," the central bank said in a statement after delivering its fourth consecutive outsized hike. "As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target."
The Bank of Canada leads its advanced-economy peers in policy tightening, having raised its policy rate by 300 basis points since March from a record low 0.25%, and it does not yet appear to be done.
"It does feel as though the bank is preparing the market for the possibility that rates will need to keep moving higher for more than one or two more meetings," said Andrew Kelvin, chief Canada strategist at TD Securities.
"I think they are trying to keep as many options as open as possible," he added.
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Reserve Bank Of Australia Hikes Rates By 50 Bps, Bank Of Canada Expected To Raise Rates By 75 Bps
By Julie Gordon and David Ljunggren - Yesterday
OTTAWA (Reuters) - The Bank of Canada hiked interest rates to their highest level in 14 years on Wednesday, as expected, and signaled its most aggressive tightening campaign in decades was not yet done as it battles to tame inflation.
The central bank, in a regular rate decision, hiked its policy rate to 3.25% from 2.50%, matching analyst forecasts and hitting a level not seen since April 2008. Rates are now above the BoC's neutral range, meaning that for the first time in about two decades monetary policy is likely to restrict growth.
"Given the outlook for inflation, the Governing Council still judges the policy interest rate will need to rise further," the central bank said in a statement after delivering its fourth consecutive outsized hike. "As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target."
The Bank of Canada leads its advanced-economy peers in policy tightening, having raised its policy rate by 300 basis points since March from a record low 0.25%, and it does not yet appear to be done.
"It does feel as though the bank is preparing the market for the possibility that rates will need to keep moving higher for more than one or two more meetings," said Andrew Kelvin, chief Canada strategist at TD Securities.
"I think they are trying to keep as many options as open as possible," he added.
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Reserve Bank Of Australia Hikes Rates By 50 Bps, Bank Of Canada Expected To Raise Rates By 75 Bps
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2:22
Canada's GDP edged up 0.1% in June, below expectations cbc.ca
The Bank of Canada, like many of its peers, faces intense criticism for downplaying hot inflation as "transitory" last year and not acting swiftly enough as price increases gathered steam.
The front-runner to lead Canada's opposition Conservatives, Pierre Poilievre, has promised to fire central bank Governor Tiff Macklem if he's elected prime minister and to replace him with someone "who will fight inflation."
Canadian Finance Minister Chrystia Freeland defended the central bank to reporters on Wednesday, saying it had the mandate, tools and experience to tackle the price gain problem.
SOARING PRICES
Inflation eased to 7.6% in July from 8.1% in June, but the decline was due to a drop in gasoline prices, with the core measures continuing to move higher, the central bank said.
"Surveys suggest that short-term (inflation) expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched," the central bank said.
Money markets are betting on two more quarter-percentage-point increases this year to lift the policy rate to 3.75% in December.
Economists noted the possibility of a 50-basis-point hike in October followed by a standard 25-basis-point increase in December, opening the door to a policy rate of 4.00% by the end of the year, though much will hinge on the path of inflation and employment over the coming months.
"There's a fairly high risk that they hike rates at each of the next two meetings," said Doug Porter, chief economist at BMO Capital Markets. "We'll have to see whether those are just small hikes or larger, and I think a lot of that will depend on what happens to headline and core inflation in the next few months."
The Canadian dollar was trading 0.1% higher, at 1.3145 to the greenback, or 76.07 U.S. cents, after touching its weakest level in nearly eight weeks at 1.3208 before the BoC's policy announcement.
(Reporting by Julie Gordon and David Ljunggren in Ottawa; additional reporting by Ismail Shakil in Ottawa, Fergal Smith in Toronto and Steve Scherer in Vancouver; Editing by Andrea Ricci, Paul Simao and Leslie Adler)
2:22
Canada's GDP edged up 0.1% in June, below expectations cbc.ca
The Bank of Canada, like many of its peers, faces intense criticism for downplaying hot inflation as "transitory" last year and not acting swiftly enough as price increases gathered steam.
The front-runner to lead Canada's opposition Conservatives, Pierre Poilievre, has promised to fire central bank Governor Tiff Macklem if he's elected prime minister and to replace him with someone "who will fight inflation."
Canadian Finance Minister Chrystia Freeland defended the central bank to reporters on Wednesday, saying it had the mandate, tools and experience to tackle the price gain problem.
SOARING PRICES
Inflation eased to 7.6% in July from 8.1% in June, but the decline was due to a drop in gasoline prices, with the core measures continuing to move higher, the central bank said.
"Surveys suggest that short-term (inflation) expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched," the central bank said.
Money markets are betting on two more quarter-percentage-point increases this year to lift the policy rate to 3.75% in December.
Economists noted the possibility of a 50-basis-point hike in October followed by a standard 25-basis-point increase in December, opening the door to a policy rate of 4.00% by the end of the year, though much will hinge on the path of inflation and employment over the coming months.
"There's a fairly high risk that they hike rates at each of the next two meetings," said Doug Porter, chief economist at BMO Capital Markets. "We'll have to see whether those are just small hikes or larger, and I think a lot of that will depend on what happens to headline and core inflation in the next few months."
The Canadian dollar was trading 0.1% higher, at 1.3145 to the greenback, or 76.07 U.S. cents, after touching its weakest level in nearly eight weeks at 1.3208 before the BoC's policy announcement.
(Reporting by Julie Gordon and David Ljunggren in Ottawa; additional reporting by Ismail Shakil in Ottawa, Fergal Smith in Toronto and Steve Scherer in Vancouver; Editing by Andrea Ricci, Paul Simao and Leslie Adler)
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