The Bank of Canada decided to temporarily halt its efforts to combat inflation, opting to keep its primary interest rate steady at 5 percent as of September 6. The forthcoming announcement regarding interest rates is scheduled for October 25. It’s worth noting that the primary BoC interest rate remains at the 5 percent mark. Mark your calendar for the upcoming interest rate announcement on October 25.

Canada is currently facing its highest inflation rate in a generation, with goods and services prices surging over the past two years, eroding the purchasing power of the Canadian dollar and making life less affordable.

The annual change in the Consumer Price Index (CPI) is the measure of inflation, and the BoC’s primary aim is to keep it at 2 percent. In June 2022, CPI inflation reached an unprecedented 8.1 percent, but it has been decreasing since then, registering at 2.8 percent in June 2023.

The causes of inflation have evolved. In 2021, high demand for goods, driven by government financial support and low interest rates, collided with COVID-19-related supply disruptions, resulting in price hikes. Additionally, Russia’s invasion of Ukraine substantially increased global food and energy prices.

Oil prices have since decreased, and supply chains have improved, lowering shipping costs and decreasing goods inflation. Presently, inflation is mainly fueled by rising service prices, attributed to Canada’s tight labor market and rapid wage growth.

The BoC interest rates are utilized as a tool to manage inflation. When it raises interest rates, it increases the cost of borrowing for households and businesses, making it more challenging for them to service their debts. This, in turn, curbs demand for goods and services, with the goal of slowing down the rate of price increases.

As of September 6, the BoC decided to keep its benchmark interest rate unchanged at 5 percent, a level not observed since April 2001.

The bank’s current projection anticipates inflation to hover around 3 percent for the coming year, eventually declining to the 2 percent target by mid-2025.

The majority of Canadians encounter interest rates in the context of mortgages and various forms of consumer debt, such as credit cards, personal loans, and auto loans. The prime rate, which serves as the basis for interest rate calculations on variable-rate mortgages and home-equity lines of credit by commercial banks, has increased from 2.45 percent in 2021. Fixed-rate mortgage interest rates have also seen an increase.

Interest rate adjustments typically have a delayed impact, often taking 18 to 24 months to fully influence economic growth and inflation. The most notable consequences observed so far have occurred in the housing market, where both sales and prices experienced a significant decline last year. Although economic activity more broadly has started to slow down, it has done so to a lesser extent than what many economists had anticipated last year. The Bank of Canada foresees economic growth stalling during the middle quarters of 2023, accompanied by an increase in unemployment.

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