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Bank of Canada's Current Interest Rate: 5%
This has been unchanged for the third consecutive time since July, with the next announcement coming out on January 24, 2024.
The main impactor of the interest rate is inflation. In order to combat inflation the Bank of Canada raises interest rates to reduce damands for goods and services with the hope that this will curb inflation.
So what has inflation been like in Canada as of late? Inflation is measured by the annual change in the Consumer Price Index. The Bank of Canada’s overarching goal is keeping this to 2 per cent. CPI inflation hit a four-decade high of 8.1 per cent in June 2022, and it has been trending down since then. It clocked in at 2.8 per cent in June 2023.
While there have been many different factors driving inflation in the past few years, the current driver for inflation is rising service prices due to the tightness in Canada's labour market and rapid wage growth.
The average Canadian will experience the effects of interest rates through mortgages and other types of consumer debt. Interest rate changes often lag often taking 18-24 months to see a full impact on economic growth inflation. Interest rates for both variable rate and fixed rate mortgages rose in 2021 which saw sales volumes and prices in the housing market falling last year.
On September 6, the Bank of Canada left its benchmark interest unchanged from 5 per cent, a level last seen in April 2001.
The bank now expects inflation to remain around 3 per cent for the next year, before declining to the 2-per-cent target by the middle of 2025.
Most Canadians experience interest rates through mortgages, and through various forms of consumer debt, including credit cards, personal loans and auto loans. The prime rate, which commercial banks use to calculate interest rates on variable rate mortgages and home-equity lines of credit, has risen from 2.45 per cent in 2021. Interest rates for fixed-rate mortgages have also risen.
Interest rate changes work with a lag, often taking 18 to 24 months to have a full impact on economic growth inflation. The most visible impact so far is in the housing market, where sales volumes and prices fell sharply last year. The Bank of Canada expects the economic growth to stall through the middle quarters of 2023 and unemployment to rise.
The article is sourced from the Globe and Mail article: https://www.theglobeandmail.com/topics/bank-of-canada/
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