In its first policy interest rate announcement of the year – on January 26th – the Bank of Canada (BoC) maintained its current record-low rate of 0.25%. The decision was in line with 2021 forecasts that a rate hike would occur in the second or third quarter of 2022. Nonetheless, record levels of inflation, chronically high house prices and increasing costs of consumer goods led many economists to speculate that maintaining the status quo was not an option.


For now, the BoC is keeping a watchful eye on the lingering Omicron variant, citing its impacts on business and consumer spending as a leading factor for upholding the current rate. Canadian interest rates have been at a record low since the onset of the pandemic in March 2020, but increases are on the horizon. Curbing inflation and the state of the economy will play a key role in how often, and by how much, they rise.


A recent Reuters poll of economists predicts multiple interest rate hikes in 2022 culminating to approximately 1% by year-end. Of the same opinion are Canada’s Big Six banks who expect a number of gradual hikes over the course of the seven remaining scheduled announcements landing at 1%. Some investors predict that a series of six hikes to reach pre-pandemic levels of 1.75% is more likely.


How important is inflation?

Inflation will play a key role in upcoming interest rate levels. Canada’s Consumer Price Index (CPI) determines the rate of inflation by considering changes in the cost of consumer goods and services – both of which have been severely affected by high demand and supply chain disruptions. Current inflation sits at over 4% – well above the Bank’s 2% target – and reached a 30-year high in December 2021 at 4.8%. The BoC has acknowledged inflation rates are above the target range, but says they expect it to decline to about 3% by the end of the year, and drop further towards their target rate of 2% by 2024. 


What’s happening with home prices?

Interest rates and inflation levels are also impacting the housing market. Home prices are expected to keep rising into the spring due to ongoing supply shortages. Mortgage rates are expected to rise in keeping with the BoC’s forthcoming hikes, which may moderate demand, but real estate is expected to remain strong over the course of the year. And with any luck, an increase in supply will help restore a semblance of balance.


Preserving relatively low borrowing costs during a time of uncertainty is critical to help restore growth and foster economic stability. Canada’s central bank will want to avoid shocking consumers with abrupt increases, which could slow economic activity and hinder consumer confidence. Still, policy-making decisions related to both timing and frequency may be influenced as much by forecasting analyses as they are by the fluidity of COVID-19 and its disruptive variants.

The BoC’s next scheduled interest rate announcement is March 22nd.

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