rates
02. rates Interest rates are at their highest point since 2008, while inflation has started to decline. The big question now is, when will rates follow?
INTEREST-ING TIMES AHEAD
Much of 2022 will be defined by runaway inflation around the world and central banks’ responses to it. Dovish monetary policy, fiscal stimulus, supply chain disruptions, war and economic sanctions, and climate events all contributed to inflationary pressures both in Canada and abroad. Here in Canada, we entered last year with an inflation rate of 4.8% and watched it increase rapidly before peaking at 8.1% in June. The Bank of Canada’s response to inflation began in March 2022, when it embarked on the first of eight consecutive increases to its policy rate. Headline inflation has most recently dropped to 5.2%, as of February, and is expected to decline further. Given the rapid run-up in prices in the early part of 2022, base year effects mean that overall inflation is likely to fall in the coming months whether price pressures continue to ease or not.
The Bank of Canada has indicated that inflation is on a path to reach its target range of 1%-3% by the middle of 2023 and believes that its monetary policy interventions are working. With this in mind, the bank has opted to hold its policy rate at 4.5% at its most recent meeting in March, while continuing to engage in quantitative tightening (which is the selling of government bonds by the central bank and seeks to put upward pressure on bond yields and in-turn fixed mortgage rates). As we move through 2023, if inflation continues on its downward trajectory, it is likely that the Bank of Canada will not raise interest rates again. They will, however, need to see inflation firmly back within their target range for a period of time before they consider lowering interest rates.
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