policy
IF IT IS GUIDANCE YOU SEEK, IT IS GUIDANCE YOU’LL GET The Bank of Canada influences interest rates in two direct ways: conspicuously through its setting of the so-called overnight target rate, and less conspicuously through its participation in bond markets.
At their March 2022 meeting, the Bank’s board of governors noted that “inflation pressures remain elevated” and thus “interest rates will need to rise further”. The Bank also indicated that it will enter a phase of Quantitative Tightening (the opposite of Quantitative Easing), whereby it divests itself of Government of Canada bonds and supports a rising bond yield environment. As these portended changes will have knock-on effects for both variable-rate and fixed-rate mortgages, the time is now for households to begin to plan for higher monthly mortgage costs.
It also indirectly influences rates—in a circular way, perhaps—by providing “forward guidance” on how they plan to influence interest rates in the future. Armed with this information, households, business, and governments can then adjust their spending and savings plans in anticipation of future rate changes, which in turn can, in theory, undermine the need for the Bank to actually follow through on their planned rate changes. Make sense?
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