Bank of Canada Hikes Key Interest Rate, But It Could Be the Last

The Bank of Canada raised its benchmark interest rate by 25 basis points to 4.5%, the highest level since 2007. This represents the eighth consecutive rate hike. In 2022, the Bank of Canada raised its key lending rate from 0.25% in March to 4.25% by December.

Canada’s central bank has been raising its overnight lending rate at an unprecedented pace in an effort to tame down inflation. Canada’s inflation rate peaked at 8.1% in June 2022 and has been slowly coming down since then and currently stands at 6.3%.

While that’s still too high, and far above the central bank’s two percent target, the Bank of Canada said it expects inflation to “significantly decline” over the coming months, hitting three percent in mid-2023 and two percent in 2024. If inflation does start to come down the central bank said it expects to hold its benchmark rate at the current level.

When Will The Bank of Canada Cut Interest Rates?

But there’s a caveat.

“To be clear, this is a conditional pause,” Governor Tiff Macklem said. “If we need to do more to get inflation to the two percent target, we will.”

In other words, additional rate hikes are on pause, but could be reinstated if the economy heats up. And talks of rate cuts are not on the table, at least not until 2024 at the earliest.

The latest rate hike means the cost of borrowing is going up again which will impact variable rate mortgages, a line of credit, or other loans with variable interest rates. That’s because the prime rate that banks charge is influenced by the Bank of Canada’s overnight lending rate.

When the central bank raises the rate, it becomes more expensive for banks to borrow money. Instead of eating that increase, banks raise their prime rate with individuals and businesses covering the costs.

This could negatively impact home prices and those with variable rate mortgages. Tiff Macklem, head of the Bank of Canada, also noted that cumulative rate hikes will strain Canada’s broader economy. Analysts have noted that numerous, aggressive rate hikes would tip the Canadian economy into a recession in 2023.

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As expected, the Bank of Canada raised its key lending rate by 25 basis points to 4.5% in an effort to tackle stubbornly high inflation. The central bank said it would pause rate hikes for now, but if the economy remains too hot, it could announce additional rate hikes.

While the aggressive policy rate hikes are taking a toll on the economy, consumer confidence, and business spending, the trading experts at Learn-To-Trade.com understand some stocks and sectors do better than others in a high interest rate and recessionary prone environment.

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