Bank of Canada further slowed rate hikes as scheduled, USD/CAD rose 55 points short-term
At 23:00 Beijing time on Wednesday (January 25), the Bank of Canada announced a new policy, further reducing the rate hike rate to 25 basis points as scheduled, suggesting that core inflation has peaked. USD/CAD rose 55 pips to 1.3424 as of writing.
After this rate hike, the Bank of Canada’s overnight interest rate rose to 4.50%, the highest level since October 2007. Bank of Canada resolution: “ready” to raise interest rates once more if necessary to curb inflation.
Bank of Canada resolution: It is expected that Canada’s inflation rate will fall to 3% by the middle of this year and 2% in 2024. The Canadian economy is expected to grow by 3.6% in 2022 (from 3.3% in October), 1% in 2023 (from 0.9% in October), and 1.8% in 2024.
Bank of Canada: The three-month measure of core inflation has fallen, suggesting that core inflation has peaked. But more stubborn service sector inflation is the biggest (inflationary) upside risk. The recent Canadian economic growth has been stronger than expected, and the economy is still in a state of excess demand.
Bank of Canada: There is growing evidence that restrictive economic policies are slowing economic activity, especially household spending. Weak foreign demand is likely to weigh on exports, and an overall slowdown in economic activity will allow supply to catch up with demand. Consumer spending on services and business investment are expected to slow as the impact of higher interest rates continues to play out in the economy.
The Bank of Canada raised its benchmark interest rate to 4.25 percent at a record pace of 400 basis points last year and said following its last hike that decisions on how to raise rates further would depend on economic data.
However, in October last year, the Bank of Canada chose to raise interest rates by 50 basis points, which was lower than market expectations, indicating that it has begun to realize the possibility of excessive interest rate hikes. Concerns are growing that too rapid a pace of rate hikes might cause problems for the housing market.
National Bank of Canada economists Matthieu Arseneau and Taylor Schleich wrote: “Those who believe that further rate hikes will not kill the economy forget that at this stage of the business cycle, the impact of further rate hikes is not linear. In other words, the marginal Growth may be the straw that breaks the camel’s back.”
RATESDOTCA Mortgage Specialist Victor Tran said: “It’s going to be an interesting spring…we may see a more subdued housing market than usual during the traditional spring home buying rush as buyers wait for the market to bottom out before making a purchase. “
He also predicted that the spring market might see a surge in the number of investors forced to sell apartments, possibly double the usual number. A flood of new construction hitting the market in 2023 might push condo prices down even further.
