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The Bank of Canada recently raised its policy interest rate again on July 12. With a 25-basis-point hike, the Bank of Canada’s latest decision on interest rates remarkably increases borrowing costs. Meanwhile, the development depicts the first time since April 2001 that the bank’s interest rate reached 5 percent.

Why Does the Bank of Canada Raise Interest Rates?

The bank announced via its Monetary Policy Report that it decided to hike its interest rates in Canada to slow economic growth. The document also claims that the bank chose to reduce core inflation in the country.

Before the announcement, the bank’s prediction of core rates has fallen short of the monthly rates for three months. Meanwhile, core inflation reportedly hovered around 3.5 to 4 percent since last September. According to the Bank of Canada’s Monetary Police Report, the persistent core inflation rate in the North American country suggests that inflation might be more stubborn than predicted.

The Bank of Canada began increasing its rates in March 2022. In response, inflation dropped from a peak of 8.1 percent last summer to 3.4 percent in May 2023. Its latest interest rate hike in Canada is the tenth since March last year.

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When Will the Bank of Canada Lower Interest Rates?

Speaking about the development, Bank of Canada Governor, Tiff Macklem said, ‘We’ve come a long way, and we don’t want to squander the progress we’ve made.’ ‘We need to stay the course to restore price stability,’ he added.

Meanwhile, the commercial bank acknowledges that interest rate hikes, easing supply constraints, and dipping energy rates have helped reduce inflation. It, however, predicts that inflation will stay elevated by 3 percent by 2024. It says economic growth sees more momentum for demand and more-than-expected consumer spending in Q1 2023.

Macklem observes that the downward momentum in inflation is dipping while warning that the trend could see a reverse if the bank isn’t careful. ‘It’s too early to talk about cuts,’ he declared, suggesting that the Bank of Canada isn’t likely to lower its interest rates anytime so

According to regulations by the Central Bank interest rates in Canada should stay below two percent. The apex bank’s forecasters predict that inflation will return below two percent by the middle of 2025, six months before the earlier predicted time.

The Central Bank of Canada’s forecasters claims that excess demand, higher-than-expected housing prices, and higher-than-expected prices of tradable goods affected the change in the inflation outlook. However, they predict that the next stage in inflation decline is less certain and will take longer.

History of the Bank of Canada’s Interest Rates

The Bank of Canada decided on three rate hikes of 25 basis points in 2018. Its most recent hike had been October 24. Last October, the Bank of Canada raised the interest rate from 1.5% to 1.75%. The bank had made the October increase in interest rate amid viable global economic growth in both North American giants, US and Canada. 

Meanwhile, the financial giant maintained the rate at 1.75% over 2019, alleging concerns about the trade war between the US and China (and its impact on global commodity prices and demand) and slowing global economic growth.

In 2020, the Bank of Canada reduced their interest rates by 50 basis points three times to salvage the economy during COVID-19 restrictions. These reductions brought the Bank of Canada’s interest rate to 0.25%, while the inflation rate stood below the 2% target in 2020. However, the bank maintained its key rate at 0.25% until March 2022, when it began increasing interest rates to 0.5%. 

What is the Interest Rate Prediction for 2023 in Canada?

Macklem says the monetary policy still has work on its hands, emphasizing the need for the institution to meet its two percent target. Although the bank maintains its warning that the progress towards its two percent expectation could stall, it projects that the Canadian economy will avoid a recession.

Per inflation predictions, the Bank of Canada expects the country’s real GDP growth to slow to 1.5 percent in Q2 2023 and hover around one percent through Q4 2021 and Q2 2024. However, the bank predicts economic growth will revive in 2025, with GDP growth projected to hit 2.4 percent.

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Bank of Canada raises interest again on July 12: the tenth successive such hike in interest since March 2022, making borrowing costs more expensive. Get details in this post.