New Brunswick Real Estate Association

Bank of Canada increases interest rates and continues quantitative tightening

The Bank of Canada started its 2023 schedule of rate announcements by increasing its target for the overnight lending rate by 25 basis points to 4.5%, while at the same time continuing its policy of quantitative tightening.

The Bank indicated that global inflation remains high and broad based but is beginning to retreat in many countries driven mainly by lower energy prices and supply chain improvements. The Bank also cited that financial conditions have eased in recent months but continues to remain restrictive along with the Canadian dollar remaining stable relative to its US counterpart.

In Canada economic growth has been stronger than initially expected amidst excess demand and a tight labour market. Notwithstanding, restrictive monetary policy is contributing to a slowdown in economic activity as evidenced by the recent decline in household spending and the steep decline in housing market activity. Rising interest rates are also expected to negatively impact business investments, while weaker foreign demand will likely dampen on exports.

The Bank estimated that the Canadian economy grew by 3.6% in 2022. Looking ahead, the Bank expects GDP growth to slow to about 1% in 2023, followed by a slightly stronger pace of growth of around 2% in 2024.

Inflation has eased in the second half of 2022, declining from 8.1% in June to 6.3% in December, driven mainly by lower prices for gasoline and durable goods. The Bank acknowledged the hardships being faced by many Canadians as food and shelter costs continue to rise. Despite short-term inflation expectations remaining elevated, indications are that core inflation has probably peaked as evidenced by the recent decline in the 3-month measures of core inflation.

Overall, the Bank projects a significant pullback in CPI inflation this year, which is expected to come in at around 3% by mid-2023, then further retreating to the Bank’s 2% target by 2024. Lower energy prices, supply chain improvements, and rising interest rates are all expected to be the main contributing factors to lower inflation this year and next.

Looking ahead, the Bank noted that should future economic developments evolve in line with their expectations it might pause its rate hikes and assess its monetary policy stance. The Bank also cited that it is committed to restoring price stability and will increase rates further if needs be in order to return inflation to its 2% target.

The Bank of Canada’s next scheduled interest rate announcement will be on March 8, 2023.


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