Bank of Canada Hints Interest Rate Rises Could Ease

Assessments will go on to judge the efficacy of how the tightening of monetary policy is working in slowing down demand, and how supply chain challenges are being met.

The Bank of Canada has increased interest rates by 0.50% to 4.25% in its seventh consecutive rate rise but has indicated that rate increases may slow down.



It is the second successive time that rates have been raised by the 0.50% benchmark, after the increases of 0.75% and 1% in September and July this year respectively.

Not since early 2008 during the global financial crash has the cost of borrowing been so high.

The overnight rate, or the interest that banks and financial institutions charge for overnight borrowing or lending, alongside the bank deposit rate were also set at 4.25%.

Looking ahead the Governing Council of the Bank said that it will be considering if further rate rises are needed to tame inflation and bring supply and demand back into balance.

Assessments will go on to judge the efficacy of how the tightening of monetary policy is working in slowing down demand, and how supply chain challenges are being met.

Third Quarter Growth Robust

The Bank of Canada said that economic activity was stronger in the third quarter of this year at 0.7%, where the economy operated in excess demand conditions.

The Canadian economy has not fallen into negative growth since the second quarter of last year.

“While commodity exports have been strong, there is growing evidence that tighter monetary policy is restraining domestic demand: consumption moderated in the third quarter, and housing market activity continues to decline.” The Bank’s latest statement read.

High Inflation Prompts Rise, Analysts Split

Inflation remains stubbornly high at 6.9% in October, even though the consumer price outlook remained stable compared to the previous month, and down from the June peak of 8.1% inflation.

Spiraling motor fuel and mortgage costs were the main reasons behind the October figure, which offset the rise in food prices slowing down.

Measures in core inflation, prices excluding the food and energy sectors, remained around the 5% mark.

Yet the Bank said in its statement that three-month rates of change in core inflation have come down, a promising and early indicator that price pressures may be losing momentum.

Overall prices are still too high and way above the 2% target inflation rate, and the Bank says that the short-term inflation rate is still at an elevated level.

The Bank expects that the longer that consumers and businesses anticipate inflation to be above the 2% target, the greater the risk becomes that higher inflation becomes entrenched in the Canadian economy.

The Bank has also turned to quantitative tightening to complement the rate rises that began in March.

Its hoped that the assert selling policy where the money supply will be reduced in the economy will be a significant weapon against inflation.

Before the rate announcement market sentiments were divided on what to expect from the Bank.

In a poll compiled by Bloomberg, only a slim majority of economists thought there would be a 0.50% rate increase.

Many swaps traders were leaning towards a slowing down of the rate increases with a 0.25% hike.

ING believes that Canada’s rate rising cycle is now approaching its end as recession fears are growing, and the banking giant said that the rate hike policy is now in “restrictive territory”.

It also predicted that the Canadian Dollar would be boosted by a short-lived rise in fortunes following a 0.50% rise.

Stock Market, Canadian Dollar Rise then Fall

The S&P/TSX index initially reacted positively to the news that the brakes could be applied on future rate hikes, before falling by 0.11% to 19,967 within hours of the announcement.

While the Canadian Dollar performed in a similar way against the US Dollar and the UK Pound.

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