50 basis point hike follows a 75 basis point hike in September.
The Bank of Canada has raised the benchmark interest rate from 3.25% to 3.75%.
The move comes as inflation remains elevated, with prices surging 6.9% last month.
After leaving the interest rate at 0.25% for an extended period of time, the last six months have seen interest rate increases of 0.25%, 0.50%, 0.50%, 1.00%, 0.75%, and 0.50% respectively.
In their official statement on the interest rate hike, the Bank of Canada is noting that higher rates are impacting the economy:
“The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening. Also, the slowdown in international demand is beginning to weigh on exports. Economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy. The Bank projects GDP growth will slow from 3¼% this year to just under 1% next year and 2% in 2024.”
It’s interesting that the Bank of Canada is not predicting a recession, even as a growing number of economists and banks are doing so.
Given their past record on predictions, there is likely little trust in Bank of Canada forecasts.
And, while interest rate hikes are necessary, they are necessary because of the actions of the Bank of Canada and the Trudeau government.
The Bank of Canada enabled Justin Trudeau’s reckless spending, and then repeatedly failed to anticipate the impact.
Two years ago, politicians like Pierre Poilievre were warning that Bank of Canada policies were going to lead to rampant inflation. The Bank of Canada disputed that, claiming ‘deflation’ was the biggest risk, and then claiming inflation would be ‘transitory’.
They also said borrowing costs would remain low for a significant period of time, leading many Canadians to believe they could sustainable accrue more debt.
Instead, the Bank of Canada has been forced to pivot to higher rates. Ironically, because inflation expectations can feed into actual inflation, the Bank of Canada will likely have to raise rates higher than they otherwise would have if Canadians had more faith in the institution.
Yet, the only thing worse than the impact of higher rates would be the impact of not raising them high enough. If the lower basis point increase this month presages the maintenance of rates at lower levels – perhaps showing the Bank of Canada giving in to pressure from the NDP & some Liberals to keep debt cheap – then inflation will just continue to run rampant, doing far more damage to the economy than higher rates would.
Spencer Fernando
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