Bank of Canada raises key interest rate to 4.5%, balancing economic growth and inflation

Real Estate in Toronto

January 25, 2023

BoC hikes key rate to 4.5%, balancing growth and inflatio

Are you feeling the pinch of rising interest rates? Find out how the Bank of Canada’s latest key interest rate hike to 4.5% is balancing economic growth and inflation.

The Bank of Canada has announced its 8th consecutive key interest rate hike, bringing the key interest rate to 4.5 percent, the highest it has been since 2007. This move is part of an effort to balance the cooling of the labor market and a possible wage price spiral. However, it also poses risks for low-income Canadians who will likely see the largest price increases, particularly in areas such as rent which has risen 11%.

Global inflation remains high and broad-based. Inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains. In the United States and Europe, economies are slowing but proving more resilient than was expected at the time of the Bank’s October Monetary Policy Report (MPR).

China’s sudden lifting of COVID-19 restrictions has prompted an upward revision to the growth forecast for China and poses an upside risk to commodity prices. Russia’s war on Ukraine remains a significant source of uncertainty. Financial conditions remain restrictive but have eased since October, and the Canadian dollar has been relatively stable against the US dollar.

The Bank estimates the global economy grew by about 3.5% in 2022, and will slow to about 2% in 2023 and 2.5% in 2024. This projection is slightly higher than October’s. In Canada, recent economic growth has been stronger than expected, and the economy remains in excess demand. Labour markets are still tight: the unemployment rate is near historic lows, and businesses are reporting ongoing difficulty finding workers.

However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022, and housing market activity has declined substantially. As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand.

The Bank of Canada estimates Canada’s economy grew by 3.6% in 2022, slightly stronger than was projected in October. Growth is expected to stall through the middle of 2023, before picking up again in the latter part of the year. The Bank expects inflation to remain elevated at five percent, with companies having trouble managing equity. The Bank of Canada’s monetary policy is focused on price stability, but it is also important for them to consider the impact of interest rate hikes on the broader economy.

The Bank of Canada’s latest interest rate hike is a part of a balancing act to cool the labor market and prevent a wage price spiral. However, it also poses risks for low-income Canadians who will see the largest price increases. The Bank of Canada is keeping a close eye on the labor market and is prepared to adjust interest rates as necessary. The bank also expects wages to increase, which could help to mitigate the inflationary pressure.

In a nutshell, the Bank of Canada’s latest interest rate hike is a measure to balance the cooling of the labor market and a possible wage price spiral. However, it also poses risks for low-income Canadians who will likely see the largest price increases. The bank is monitoring the labor market and is prepared to adjust interest rates as necessary.

The bank also expects wages to increase, which could help to mitigate the inflationary pressure. It is a difficult adjustment for Canadians to live with high interest rates, but the bank’s ultimate goal is to achieve a stable and predictable economy. The bank will continue to monitor a broad range of indicators to ensure that the economy stays on track.

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Real Estate in Toronto – REIT

Bank of Canada raises key interest rate to 4.5%, balancing economic growth and inflation

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