What Happened
On January 25, 2023, the Bank of Canada raised its overnight rate by a quarter of a percent — to 4.5%. That brings the Bank Rate to 4.75% and the deposit rate to 4.5%. The Bank also said it would keep running quantitative tightening, which means continuing to shrink its balance sheet and pull liquidity out of the system.
The Global Picture
Inflation is still high almost everywhere, but it's starting to ease. Energy prices have come down, supply chains are healing, and that's helping cool price growth in a lot of countries. The U.S. and Europe are slowing, but holding up better than the Bank expected back in October. China just dropped its COVID restrictions, which could lift growth there — and push commodity prices back up. Meanwhile, Russia's war in Ukraine keeps adding uncertainty. Financial conditions are tight but have loosened a bit since fall, and the Canadian dollar has been fairly stable against the greenback.
The Bank figures the world economy grew around 3.5% in 2022. It expects that to slow to about 2% in 2023, then pick back up to 2.5% in 2024. That's slightly rosier than the October forecast.
What's Happening in Canada
Canada's economy has been running hotter than the Bank expected. We're still in what economists call excess demand — more spending than the economy can comfortably handle. The job market is tight: unemployment is near record lows and employers are still struggling to fill positions. But the Bank sees growing signs that higher rates are working. Consumer spending has cooled since the first half of 2022, and housing activity has dropped sharply. As rate hikes keep filtering through, the Bank expects spending on services and business investment to slow too. Weaker demand abroad will likely drag on exports. All of that should let supply catch up with demand.
Canada's economy grew 3.6% in 2022, a touch stronger than October's estimate. Growth is expected to stall through the middle of 2023, then pick up later in the year. The Bank is calling for roughly 1% growth in 2023 and 2% in 2024 — pretty much unchanged from the October outlook.
Where Inflation Stands
Inflation peaked at 8.1% in June 2022. By December it had fallen to 6.3%, thanks largely to lower gas prices and some easing in the cost of things like cars and appliances. That's progress, but Canadians are still feeling the squeeze on essentials — especially food and shelter, where prices keep climbing. People's expectations for near-term inflation are still elevated. The Bank's core inflation measures (which strip out volatile items) are still hovering around 5% year-over-year, though the three-month readings have come down, suggesting core inflation has peaked.
The Bank expects inflation to drop significantly through 2023. Lower energy costs, better global supply, and the dampening effect of higher rates on demand should bring overall inflation down to around 3% by mid-year, then back to the 2% target in 2024.
Why the Bank Raised Rates Again
The economy is still running too hot — demand is outstripping supply and pushing up prices across a wide range of goods and services. That persistent excess demand is why Governing Council decided to raise the policy rate by another quarter percent. Quantitative tightening continues to reinforce the restrictive stance.
Here's the key signal: if things unfold roughly as the Bank expects, Governing Council plans to hold the policy rate at 4.5% and watch how the cumulative rate increases play out. That said, the Bank made clear it's ready to raise rates further if needed to get inflation back to 2%. The message: they're committed to restoring price stability, and they're not declaring victory yet.
What This Means for You
If you're on a variable rate, your payment or balance is adjusting again. If you're coming up for renewal or looking to buy, you're locking in at rates that reflect this higher-for-longer environment. The silver lining: the Bank has signalled a conditional pause. Barring surprises, this may be the last hike of the cycle — but it's too soon to bet on cuts.
Now is the time to stress-test your own situation. Can you carry your mortgage if rates stay here through 2024? Are there moves — refinancing, switching products, adjusting your amortization — that give you more breathing room? The strategy that worked in 2021 probably doesn't fit 2023. If you want to walk through your options with someone who keeps up with this stuff daily, [reach out](mailto:sayhello@hellomortgage.ca). We're here to help you make a plan that fits your life, not just the headlines.
