Where We’ve Been

The Bank of Canada (BoC) sets the key interest rate, also known as the overnight rate, which influences other interest rates in the Canadian economy. This rate affects borrowing and lending rates for consumers, businesses, and governments. The BoC adjusts the rate in response to economic conditions, aiming to achieve price stability and sustainable economic growth. The BoC has an inflation target of 2% and works to achieve this target by either raising or lowering the key interest rate along with other monetary policy measures.

In 2020, due to the COVID-19 pandemic, the Bank of Canada reduced the overnight rate to a historic low of 0.25% to stimulate economic recovery. In early 2022, inflation in Canada started rapidly increasing due to the historically low interest rates as well as the enormous amount of Government stimulus that was pumped into the economy as a response to the Covid-19 Pandemic. Inflation in Canada peak in June of 2022 at just over 8%.

The Bank of Canada seeing rising inflation started hiking its key interest rate in March of 2022. The BoC then continued to raise interest rates to 4.5% in January of 2023. This pace of rate increases was historic in its pace however Canada did see larger overall rate increases in the 1980’s (BoC key rates peaked at over 20% in 1981).

Where We Are

In January 2023 with inflation cooling, the BoC paused rate increases for the time being. Inflation had fallen from its high in June of 2022 (8.14%) down to 5.92% in January. The inflation rate for March 2023 has fallen further to 4.30%.

Where We’re Going

After the last BoC meeting they indicated that the plan at present was to pause rate hikes for the foreseeable future. It was indicated in the press release from the BoC that this pause was temporary and if inflation began to increase again, they may be forced to restart rate increases.

There are a few things that could also force the BoC into action to either restart increases or begin to cut rates. As of May 3rd 2023, the US federal reserve has increased their overnight lending rate to 5.00-5.25% which could intern cause outflows of capital from Canada causing a fall in the Canadian Dollar. This would then cause inflation to increase and could force a restart to rate increases in Canada. Thankfully after the May 3rd rate increase the US fed indicated a pause to their increases as well.

There is also a chance that inflation remains sticky due to continued high levels of both consumer and governmental spending in Canada and this would force the BoC to act and increase rates to once again combat inflation.

Scenarios that would result in an interest rate cut are also present. A continued decline in the inflation rate in Canada would allow the BoC to slowly start to cut their key interest rate. This is the most likely scenario with predictions ranging from cuts starting in Q4 2023 or Q1 2024. Additionally, some external shock such as a resurgence in Covid 19 or some other world-wide event that causes large economic shocks would force the BoC to act with interest rate cuts and other monetary stimulus.

The scenario that sees rates cuts starting in Q4 2023 is most likely. Inflation seems to continue to fall and with the recent declines in the price of oil (one of the major inflation drivers in the past few years) as well as overall declines in the housing market across Canada, this continued decline in the inflation rate should continue.

Rates cuts will more than likely be slower and smaller than the increases we saw in 2022 however any decrease will be welcomed by the real estate community.

Written by Patrick Wood for William Wright Commercial

*Disclaimer: The writer studied Economics as his major in university, but would not consider himself an Economist.