The Bank raised rates by half a percent
The Bank of Canada increased its target for the overnight rate to 3.75%, with the Bank Rate at 4% and the deposit rate at 3.75%. The Bank was also continuing its policy of quantitative tightening — which means reducing the bonds it holds to help push rates higher across the board.
Why inflation was still running hot everywhere
Inflation around the world remained high and broadly based. This reflected the strength of the global recovery from the pandemic, a series of global supply disruptions, and elevated commodity prices — particularly for energy, which had been pushed up by Russia's attack on Ukraine. The strength of the US dollar was adding to inflationary pressures in many countries.
Tighter monetary policies aimed at controlling inflation were weighing on economic activity around the world. As economies slowed and supply disruptions eased, global inflation was expected to come down.
What was happening in other economies
In the United States, labour markets remained very tight even as restrictive financial conditions were slowing economic activity. The Bank projected no growth in the US economy through most of the next year.
In the euro area, the economy was forecast to contract in the quarters ahead, largely due to acute energy shortages. China's economy appeared to have picked up after the recent round of pandemic lockdowns, although ongoing challenges related to its property market would continue to weigh on growth.
Overall, the Bank projected that global growth would slow from 3% in 2022 to about 1.5% in 2023, and then pick back up to roughly 2.5% in 2024. This was a slower pace of growth than was projected in the Bank's July Monetary Policy Report.
The Canadian economy was still overheating
In Canada, the economy continued to operate in excess demand and labour markets remained tight. The demand for goods and services was still running ahead of the economy's ability to supply them, putting upward pressure on domestic inflation.
Businesses continued to report widespread labour shortages and, with the full reopening of the economy, strong demand had led to a sharp rise in the price of services.
Rate hikes were starting to slow things down
The effects of recent policy rate increases by the Bank were becoming evident in interest-sensitive areas of the economy: housing activity had retreated sharply, and spending by households and businesses was softening. Also, the slowdown in international demand was beginning to weigh on exports.
Economic growth was expected to stall through the end of the year and the first half of the next year as the effects of higher interest rates spread through the economy. The Bank projected GDP growth would slow from 3¼% in 2022 to just under 1% in 2023 and 2% in 2024.
Inflation had come down a bit but was still way above target
In the last three months, CPI inflation (the consumer price index, which measures how much everyday goods and services cost) had declined from 8.1% to 6.9%, primarily due to a fall in gasoline prices.
However, price pressures remained broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank's preferred measures of core inflation were not yet showing meaningful evidence that underlying price pressures were easing. Near-term inflation expectations remained high, increasing the risk that elevated inflation became entrenched.
Where inflation was headed
The Bank expected CPI inflation to ease as higher interest rates helped rebalance demand and supply, price pressures from global supply disruptions faded, and the past effects of higher commodity prices dissipated.
CPI inflation was projected to move down to about 3% by the end of 2023, and then return to the 2% target by the end of 2024.
More rate increases were coming
Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expected that the policy interest rate would need to rise further.
Future rate increases would be influenced by assessments of how tighter monetary policy was working to slow demand, how supply challenges were resolving, and how inflation and inflation expectations were responding. Quantitative tightening was complementing increases in the policy rate.
The Bank was resolute in its commitment to restore price stability for Canadians and would continue to take action as required to achieve the 2% inflation target.
What this meant for your mortgage
If you had a variable rate or were renewing soon, your payments were feeling the pressure. If you were watching and wondering when to lock in, this was the kind of announcement that mattered — not because it told you what to do, but because it showed you where the Bank's head was at.
The next scheduled date for announcing the overnight rate target was December 7, 2022. The Bank would publish its next full outlook for the economy and inflation, including risks to the projection, in the Monetary Policy Report on January 25, 2023.
If your situation had changed or you wanted to talk through what made sense for your renewal or next move, [reach out](mailto:sayhello@hellomortgage.ca). We're here to help you make sense of it.
