The Bank of Canada has made a 50 basis point hike to the overnight rate.Photo: Sean Pollock / Unsplash

In its third policy interest rate announcement for 2022, the Bank of Canada has raised its target for the overnight rate by 50 basis points to one per cent, the largest increase in 22 years.

Russia’s invasion of Ukraine is a major source of global economic uncertainty as oil prices climb and supply distribution faces interruption, adding to already high levels of inflation, the BoC noted in its announcement. Canada’s economic recovery from the COVID-19 pandemic has been strong as wage growth returns to its pre-pandemic pace and consumer spending improves. However, CPI inflation is 5.7 per cent in Canada — beyond the BoC’s January forecast — as a result of rising energy and food prices coupled with strong global and domestic demand.

“With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further,” said the latest decision from the BoC. “The policy interest rate is the Bank’s primary monetary policy instrument, and quantitative tightening will complement increases in the policy rate.”

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The BoC started off 2022 without any increases to the overnight rate, leaving the benchmark rate at 0.25 per cent in January. During its previous rate decision on March 2nd, the BoC boosted rates 0.25 per cent, kick-starting the first rate hike cycle since 2018.

April’s rate increase wasn’t a surprise for some. Canadian economists like those at Bank of Montreal (BMO) Economics predicted weeks ago that the BoC would raise interest rates more aggressively in its next announcement. A “sharply hawkish turn in rhetoric,” by the BoC, who stated that it was “prepared to act forcefully,” to get inflation on track, prompted the BMO economists to heightened their predictions for this month’s rate announcement. There are also expectations that this latest 50 bp jump will be the first of two that will be made in future announcements.

Here are some of the takes from Canadian economists and finance experts on the latest BoC rate raise.

Bank of Montreal (BMO) Economics

The BoC’s commentary appears to suggest that another large hike to rates is inbound, according to BMO Economics’ chief economist and managing director of economics, Douglas Porter. The central bank stated outright that “interest rates will need to rise further,” which has prompted BMO Economics to forecast another 50 bp increase in June and another potential one in July.

“The Bank of Canada delivered on the expected 50 bp rate hike and the beginning of balance sheet reduction (QT) in a combination of measures aimed at cooling much-too-hot-for-anyone’s-comfort inflation. The stern measures were backed up by stern words, pointing to the strong possibility of a follow-up 50 bp hike at the June 1 meeting. The task at hand is clear to all, and the need for speed is obvious.

As a result of the Bank’s upbeat view on growth, their concerns over inflation becoming entrenched, and their upward revision to neutral, we are lifting our call on BoC rate hikes by a further 25 bp for this year. We look for a 50 bp hike in June, and another such move in July, quickly bringing the overnight rate to two per cent, or the low end of neutral. We thus now see the Bank hiking by a further 125 bps this year to end at 2.25 per cent (previously two per cent), while still expecting another total of 50 bps in 2023, bringing the end point on rates to 2.75 per cent (previously 2.50 per cent), the upper end of their neutral range.”

TD Economics

As inflation hits close to six per cent in Canada, James Orlando, senior economist with TD Economics, said that the BoC needed to take “aggressive action.” The bank’s latest decision to raise rates will likely be followed by another 50 bp hike during the next announcement in June.

“Bam! The BoC stepped up with a widely expected acceleration in its tightening cycle. With inflation pushing towards six per cent, the labour market at full employment, and output pushing on capacity constraints, the Bank needed aggressive action. By raising the policy rate by 50 basis points for the first time in 22 years, the BoC is setting the pace for more aggressive moves in the coming months.

Our expectation is for the BoC to execute on another 50 basis point hike on June 1st and get the policy rate to two per cent by year end. With the Bank’s initiation of QT alongside higher policy rates, government bond yields should remain at current elevated levels.”

BCREA Economics

According to Brendon Ogmundson, the British Columbia Real Estate Association’s (BCREA) chief economist, the BoC’s 50 bp increase is the first rate hike greater than 0.25 per cent since May 2000.

In an Economics Now email update, the economist explained that Canada’s central bank is taking a more aggressive approach given current inflation levels and the Russian invasion of Ukraine, and expects further tightening of rates down the line.

“With inflation stubbornly high through the first quarter of the year, exacerbated by the impact of the Russian invasion of Ukraine, and unemployment in Canada hitting a record low, the Bank has opted for a more aggressive stance.

Clearly the Bank is now planning to bring its policy rate back to a neutral level, between 1.75 and 2.75 per cent, much faster than previously anticipated. We expect the Bank will continue to tighten until there is clear evidence that inflation and inflation expectations are moderating back to normal levels. This more aggressive policy stance has already been priced into 5-year fixed mortgage rates, which are now on a path to surpassing four per cent for the first time in a decade.”

James Laird, co-founder of and president of CanWise Financial mortgage brokerage, explained in an email statement that higher mortgage rates will help to push home prices down nationwide. As rates rise, how much home a buyer can purchase will fall in Canada, with each one per cent increase to the stress test lowering affordability by 10 per cent.

“As expected, the Bank increased the rate by a half point to one per cent. Higher mortgage rates will put downward pressure on home prices across the country. A significant result of rising rates is that the stress test for both insured and uninsured mortgages will increase, which means a homebuyer’s maximum affordability will decrease. For each one per cent increase to the stress test, affordability decreases by about 10 per cent.

Canadians with variable-rate mortgages and home equity lines of credit (HELOCs) will feel an immediate impact and can expect their lenders to increase their prime lending rates by 50 basis points in the coming days. This group should budget for further rate increases throughout this year. Households who currently have a fixed-rate mortgage will remain unaffected by this announcement until their term is up, at which point they should budget for higher monthly mortgage payments upon renewal.

The Bank has indicated that further rate increases should be expected. Therefore, Canadians shopping for a home should get pre-approved in order to hold today’s fixed rates for up to 120 days.”

RBC Economics

As inflation surges, the BoC seems to have “lost the patience,” it had back in January, according to Josh Nye, senior economist with RBC Economics. Although RBC predicts 25 bp hikes going forward, a larger 50 bp increase in the upcoming June announcement is likely an option as the BoC shifts to a “more neutral policy stance.”

“Today’s 50 bp move, the first hike of that magnitude in 22 years, suggests the BoC has lost the patience it demonstrated back in January when it took a pass on raising rates. With inflation surging (we think next week’s March CPI report will be in the six per cent range, another 30-year high), the unemployment rate falling rapidly (now at its lowest level since at least 1976) and businesses noting widespread capacity and price pressures, the BoC wants to move toward a more neutral policy stance in short order.

That goal post shifted slightly today, with the bank revising its estimate of the neutral rate higher by 25 bps to a two to three per cent range. Our forecast assumes more standard, 25 bp hikes going forward—until the overnight rate hits two per cent in October—though we think another 50 bp increase will be an option on the table in June.

Near-term inflation and jobs data will be key determinants of the size of upcoming rate hikes. The BoC lifted its Q1/22 GDP growth forecast to three per cent and sees activity accelerating in Q2 with a six per cent annualized gain. The bank doesn’t publish an unemployment rate forecast but if that growth is accompanied by a further decline in the unemployment rate to five per cent or lower that would support another 50 bp hike in June.

The BoC also lifted its inflation forecast and now sees headline CPI averaging almost six per cent in the first half of 2022 (up from five per cent previously, largely due to the inflationary impact of Russia’s invasion of Ukraine) before slowing to 4.5 per cent in late-2022 and 2.4 per cent toward the end of 2023. We think the bank will have limited tolerance for further upside surprises relative to that forecast, though that’s not something we expect at this stage.”

CIBC Capital Markets

Avery Shenfeld, ​​managing director and chief economist at CIBC Capital Markets, pointed out in a Economic Flash report that financial markets were already anticipating the BoC to lift rates and let maturing bonds fall off its balance sheet. Looking ahead, markets are expecting “a lot more to come,” with rates rising to three per cent down the line.

“The Bank of Canada brought out the big guns in its fight against inflation, but for those fearing the worst, it’s noteworthy that it still sees room for the economy to put in two reasonably healthy years for growth as it does that. As expected, the overnight rate was lifted by 50 basis points, and the Bank will let maturing bonds roll [off] its balance sheet to unwind some of what it bought under quantitative easing. Financial markets were already anticipating both of those moves, as evidenced by the lack of much of a response in the currency or two-year bond yields.

Further out, markets are anticipating a lot more to come with rates topping three per cent, and there’s already talk about risks of recession as the central bank starts to cool the economy’s fires. But within a policy report designed to make the case for the stern action today, there are clues that point to a lower ceiling for interest rates than markets are currently assuming, and evidence that the central bank is going to be careful to avoid snuffing out economic momentum in an economy that, despite tight labour markets, still has room for significant output gains that won’t stand in the way of returning to two per cent inflation.”

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