Bank of Canada Interest Rate Announcement (September 7, 2022)

James Orlando, CFA, Director & Senior Economist | 416-413-3180 

Date Published: September 7, 2022

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Bank of Canada delivers a 75 basis-point rate hike    

  • The Bank of Canada raised the overnight rate to 3.25% and stated that it will continue with Quantitative Tightening (QT). 
  • With respect to ongoing high inflation, it stated that "data indicate a further broadening of price pressures, particularly in services." It has also cautioned that "surveys suggest that short-term inflation expectations remain high (and) the longer this continues, the greater the risk that elevated inflation becomes entrenched." 
  • Regarding the evolution of economic growth, the Bank stated that the "Canadian economy continues to operate in excess demand and labour markets remain tight." It also mentioned that "the Bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply."
  • On the path for future policy, the Bank didn't give much guidance, as it stated that "given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further." 

Key Implications

  • The Bank of Canada continues to hike rates at a historically aggressive clip. With this latest hike, it has moved the policy rate beyond its estimated neutral range, and into economically restrictive territory.  
  • As we highlighted in our report this morning, the Bank has placed focus on the near-term data instead of the likely path of the economy. Given the lags of past interest rate hikes on inflation, we expect the BoC to hike the policy rate to 4.0% by year-end. This implies even more growth sacrifice as the BoC attempts to achieve its goal of price stability.