This morning, the Bank of Canada announced that they have increased its key interest rate by 0.25%. The prime rate will be increased from 6.70% to 6.95%. Therefore, for those who have a variable rate credit product, payments may increase by approximately $15.34 per month for every $100,000 loan.
Global inflation is coming down, reflecting lower energy prices compared to a year ago, but underlying inflation still remains high. The Bank may need to continue to raise interest rates further to restore price stability.
In the first quarter of 2023, Canada's economy was stronger than expected, with GDP growth of 3.1%. Spending on interest-sensitive goods increased and housing market activity has also picked up recently. Excess demand in the economy has been more persistent than anticipated, and there is a continued demand for labour due to higher immigration and participation rates.
CPI inflation was up to 4.4% in April, the first increase in 10 months. Prices for goods and services are higher than expected. The Bank expects inflation to ease to around 3% in the summer. However, with core inflation in the 3.5% - 4% range in the past few months and excess demand persisting, there are concerns that CPI inflation could get stuck above above the 2% target.
Based on this, the Governing Council has decided to raise the interest rate. Reducing money supply continues to complement the interest rate, and the dynamics of core inflation and outlook for CPI inflation will continue to be assessed. The Bank remains committed to restoring price stability for Canadians and achieving the 2% inflation target.
The next Bank of Canada announcement will be on July 12, 2023.
If you'd like to learn more about this recent announcement or would like to know how this affects you, please feel free to reach out to us and we'd be glad to help!