Bank of Canada continues interest rate hikes amid inflation crisis

 The Central bank of Canada continues its quantitative tightening measures after recently announcing a 0.75% percentage point hike. This tightening of the monetary policy comes amidst efforts to tame high inflation, which the central banks forecast to remain high for the foreseeable future. The 0.75% hike pushed the interest rate up from 2.50% up to 3.25%, the highest rate since April 2008. 

The interest rate now sits above the Bank of Canada’s neutral range, which could have farther-reaching consequences on economic growth and the prices of assets, such as real estate. 

"Given the outlook for inflation, the Governing Council still judges the policy interest rate will need to rise further," The bank of Canada said in its latest statement. "As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target." 

The Bank of Canada rates had seen a consistent uptick since March 2020, when rates were at a low of 0.25%. Rates are currently 300 basis points higher than the March 2020 lows. Experts feel there could be more rate hikes still to come. 

"It does feel as though the bank is preparing the market for the possibility that rates will need to keep moving higher for more than one or two more meetings," said Andrew Kelvin, chief Canada strategist at TD Securities. "I think they are trying to keep as many options as open as possible," he added. 

Canadian CPI data showed a slight cooling off in July, although the figures do not tell the whole story. CPI was reported at 7.6%, down from 8,1% due to a drop in gasoline prices. Most other goods and services saw a further price squeeze without factoring in the gasoline price. This is still some distance away from the Central bank’s target inflation rate of 2%. 

The biggest concern for the Central Bank is that the high inflation becomes entrenched in the economy and, therefore, more challenging to combat. "Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched," said the Bank of Canada. 

The property markets have felt the effects of the higher interest rates. As money gets more expensive, fewer people seek to get into the property market and borrow money at these elevated interest rate levels.