Bank of Canada delivers quarter-point hike; key interest rate now 4.5%

10 a.m.

Bank of Canada announces quarter-point rate increase

The Bank of Canada increased its benchmark interest rate by a quarter of a percentage point, raising Canadian borrowing costs for the eighth consecutive time on Wednesday.

The widely-anticipated announcement brings the policy rate to 4.5 per cent.

Central bank officials have signalled that they’re nearing the end of the aggressive rate-hike cycle. But they opted for another rate increase on Wednesday after a string of economic data releases showed that the Canadian economy is proving resilient in the face of higher borrowing costs while inflation remains worryingly high.

– Mark Rendell

9 a.m.

Analysis: Wednesday’s announcement could mark ‘crucial turning point’ in rate cycle

Wednesday’s Bank of Canada rate announcement could mark a crucial turning point in the central bank’s aggressive interest-rate cycle. I don’t want to say the actual decision on the bank’s policy rate (another quarter percentage point increase, or not?) is inconsequential. But ultimately, it will matter less than the key details of how the bank frames the future for the economy and its policy trajectory.

The rate statement itself typically runs about six to eight paragraphs, but my eyes always immediately seek out the final paragraph. That’s where the bank signals where it expects to take interest rates from here, and the key elements that will determine future decisions. It requires careful reading: Even small changes in wording, compared with the bank’s previous rate statement in December, can have big meaning.

The key phrase in the last paragraph of the December statement was, “Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further.” That was a shift from the October rate announcement (“the Governing Council expects that the policy interest rate will need to rise further”), and signalled that the bank was getting close to the end of its rate hikes.

Another rewording on Wednesday could deliver the message that rates have entered a holding pattern. However, if the bank stands pat on that phrasing, it would imply that it’s not convinced that the rate hikes to date have slowed the economy and inflation sufficiently – and that it’s keeping its options open for at least one more rate increase.

Regardless of the choice of words, we’ll want to consider them in tandem with the bank’s new economic forecasts, which will be detailed in the quarterly Monetary Policy Report, to be published at the same time as the rate decision.

The previous forecasts, in late October, overestimated fourth-quarter inflation, but they also may have overestimated fourth-quarter economic growth. There’s a chance that the fresh outlook could paint an increased risk of a mild recession. At the same time, there may be scope for the bank to chart a somewhat lower path for inflation. If it does so, that would open the door for a halt to further rate increases.

– David Parkinson

8:30 a.m.

Why is everyone talking about the Bank of Canada?

Mortgage rates are rising, home prices are falling, and talk of recession is in the air. Behind it all is the Bank of Canada and its aggressive campaign to wrestle inflation back to earth.

Over the past two years, Canada has experienced the first major inflation surge since the early 1980s. This has eroded the purchasing power of the dollar, and presented a crisis for the Bank of Canada, whose raison d’être is stabilizing the value of money.

The central bank responded last year by tightening monetary policy at the fastest pace in a generation, raising interest rates seven consecutive times. This hammered the housing market and is expected to cause the Canadian economy to stall through the first half of 2023.

At the same time, monetary policy has become a hot political topic. Conservative Leader Pierre Poilievre has said he would fire Bank of Canada Governor Tiff Macklem, while NDP Leader Jagmeet Singh has criticized the bank for continuing to raise rates.

So why is the central bank raising interest rates? What’s happening with inflation? And what control does the government have? Read our Bank of Canada explainer.

– Mark Rendell

8 a.m.

Bank of Canada expected to deliver final quarter-point rate hike

The Bank of Canada is expected to increase its benchmark interest rate by another 25 basis points today, although for the first time in nearly a year, a rate hike is not guaranteed. (A basis point is 1/100th of a percentage point.)

The central bank will announce its decision at 10 a.m. ET, followed by a press conference by Governor Tiff Macklem at 11 a.m. ET.

The bank raised interest rates seven consecutive times last year, lifting the policy rate to 4.25 per cent from 0.25 per cent in an effort to get inflation under control. Bank officials signalled in December that they are nearing the end of the rate-hike cycle. The key question for today is whether they’re ready to hit pause.

Most Bay Street analysts are expecting a final quarter-point move, which would take the policy rate to 4.5 per cent. However, the bank is now in a “data dependent” phase of monetary policy, and could surprise markets by either holding pat or announcing a larger-than-expected rate hike.

“If we are surprised on the upside, we are still prepared to be forceful,” deputy governor Sharon Kozicki said after the last rate hike in December.

“But we recognize that we have raised interest rates rapidly and that their effects are working their way through the economy. In other words, we are moving from how much to raise interest rates to whether to raise interest rates.”

Economic data since December has come in stronger than expected, with particular strength in the labour market. Because the bank is intentionally trying to slow down the economy, this resilience through the final quarter of 2022 argues in favour of another hike.

Analysts will be watching for hints about the trajectory of future interest rates. Will Mr. Macklem be explicit about the end of the rate-hike cycle, or will he maintain that decisions will depend on incoming data? Will there be any mention of holding rates at their current level for an extended period? All eyes will be on the press conference.

The bank will also publish its quarterly Monetary Policy Report, containing new economic growth and inflation forecasts. In its last report from October, the bank said it expected GDP growth to stall through the first half of 2023, putting the economy on the edge of recession. Watch for any explicit mentions of the R-word.

Read more about today’s expected Bank of Canada interest rate hike announcement.

– Mark Rendell

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