Breaking Down the Bank of Canada’s Rate Hikes: A Timeline – BNN Bloomberg

A timeline of Bank of Canada rate hikes

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Published: October 25, 2023

Introduction

The Bank of Canada has raised its interest rates to five per cent over the past year and a half, from a low of 0.25 per cent in March 2022. With inflation trending downward and the economy showing signs of slowing, economists predict that the rate hiking cycle may be coming to an end. However, the Bank of Canada has not ruled out future hikes and has not indicated when it will cut rates. Economists expect that the central bank will hold rates at five per cent in its upcoming rate decision.

Here is a timeline of the rate decisions that have led us to the current state of affairs.

March 2, 2022: 0.25% to 0.50%

In response to rising inflation due to higher oil and commodity prices driven by Russia’s sudden invasion of Ukraine, the Bank of Canada raised interest rates by 25 basis points to 0.50 per cent.

April 13, 2022: 0.50% to 1.00%

The Bank of Canada increased interest rates by 50 basis points to one per cent. This decision was accompanied by the announcement that the central bank would begin quantitative tightening, reducing the amount of money available to the financial markets by selling or allowing its government bond holdings to mature. The conflict between Russia and Ukraine intensified, further driving up energy prices and inflation.

June 1, 2022: 1.00% to 1.50%

The Bank of Canada raised interest rates by 50 basis points to 1.50 per cent. This decision was made in response to Canadian inflation reaching 6.8 per cent in April, well above the bank’s target rate. The central bank anticipated that inflation would continue to rise due to excess demand within the Canadian economy, as well as increasing food and energy costs.

July 13, 2022: 1.50% to 2.50%

The largest single rate hike in over two decades occurred when the Bank of Canada raised interest rates by 100 basis points to 2.50 per cent. The central bank predicted that inflation would remain at around eight per cent for the next few months.

September 7, 2022: 2.50% to 3.25%

The Bank of Canada increased its key rate by 75 basis points, bringing the overnight lending rate to 3.25 per cent. The central bank continued with its quantitative tightening measures, citing geopolitical tensions, weakened demand from China, and a tight Canadian labour market as factors fueling inflation. The central bank warned that further rate hikes would be necessary as inflation remained above target at 7.6 per cent.

October 26, 2022: 3.25% to 3.75%

The Bank of Canada raised interest rates by another 50 basis points to 3.75 per cent. The central bank stated that Canada’s economy was demanding more goods and services than the available supply, exerting upward pressure on domestic inflation. The recent string of rate hikes began to show in the country’s receding housing activity and softening in household and business spending.

December 7, 2022: 3.75% to 4.25%

The central bank raised interest rates by another 50 basis points to 4.25 per cent, the highest rate since January 2008. The Bank of Canada pointed to Canada’s stronger-than-expected third-quarter gross domestic product and near-historic low unemployment as factors that would keep inflation elevated into 2023.

January 25, 2023: 4.25% to 4.50%

The Bank of Canada increased interest rates by 25 basis points to 4.50 per cent. This rate hike was smaller than previous increases, as the central bank noted that inflation was decreasing globally. However, inflation in Canada was still far from the Bank of Canada’s target rate of two per cent, registering at 6.3 per cent in December 2022.

March 8, 2023: Pause at 4.50%

The Bank of Canada decided to keep rates on hold and left its overnight lending rate at 4.50 per cent. Economic growth in Canada had stalled in the fourth quarter of the previous year, lower than the central bank’s expectations. The Bank of Canada forecasted further weakening of economic growth and anticipated easing inflation pressures in the upcoming quarters.

April 12, 2023: Pause at 4.50%

The Bank of Canada took a wait-and-see approach and maintained interest rates at 4.50 per cent.

June 7, 2023: 4.50% to 4.75%

After two consecutive pauses, the Bank of Canada raised its overnight lending rate by 25 basis points to 4.75 per cent. This decision was driven by an uptick in inflation to 4.4 per cent, the first increase in 10 months, as well as stronger-than-expected economic growth in the first quarter of the year. The central bank also expressed caution about increased activity in the housing market.

July 12, 2023: 4.75% to 5.00%

Another 25-basis-point hike brought the bank’s overnight lending rate to five per cent. The Bank of Canada identified the tight labour market and increased housing market activity as risks for further inflation.

September 6, 2023: Pause at 5.00%

The Bank of Canada held the overnight lending rate at five per cent. The central bank noted an overall easing in inflation, despite a reacceleration to 3.3 per cent in July. Evidence of easing excess demand in the economy was also observed. However, the bank emphasized that it would not hesitate to hike rates again if necessary.

October 25, 2023: Rate hold expected

The Bank of Canada is scheduled to deliver its next interest rate decision. Economists forecast a rate hold as inflation came in at 3.8 per cent last month, weaker than the expected 4.0 per cent.

Editorial and Advice

The timeline of Bank of Canada rate hikes highlights the central bank’s ongoing efforts to combat rising inflation and manage the Canadian economy. The rapid increase in rates has been driven by various factors, including geopolitical tensions, increased housing market activity, and supply-demand imbalances.

While the Bank of Canada has successfully contained inflation to some extent, it is crucial for policymakers to monitor the potential impact of further rate hikes on the overall economy. Higher interest rates can have a cooling effect on economic growth, particularly in sectors like housing and consumer spending.

At this juncture, with inflation showing signs of easing and the economy slowing, it is reasonable for the central bank to pause its rate hikes. However, the Bank of Canada must remain vigilant and ready to adjust its monetary policy if inflationary pressures persist or new challenges arise.

For Canadian consumers and businesses, it is essential to prepare for a potential slowdown in economic activity. Higher interest rates mean increased borrowing costs, which can affect housing affordability and the cost of doing business. It is advisable for individuals and businesses to review their financial plans and ensure they are equipped to handle potential changes in borrowing costs.

Moreover, while the central bank has not indicated when it will cut rates, it is worth considering the possibility of a rate cut in the future if economic conditions warrant it. A rate cut could provide some relief to borrowers and stimulate economic growth.

In conclusion, the Bank of Canada’s timeline of rate hikes reflects its commitment to managing inflation and ensuring a stable economy. As the central bank continues to assess economic conditions, it is important for individuals and businesses to remain attentive to potential changes in borrowing costs and adjust their financial plans accordingly.