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Bank of Canada increases key interest rate by 0.25% - January 25th, 2023

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 6.45% to 6.70%. Therefore, for those who have a variable rate credit product, payments may increase by approximately $15.20 per month for every $100,000 loan.

The stress test qualifying rate will NOT be affected. Fixed rates are currently decreasing and offer an alternative to maintain borrowing and purchasing power.

Global inflation remains high, but inflation has been coming down in many countries. This is reflected by lower energy prices and improvements in global supply chains. The war between Russia and Ukraine remains a significant source of uncertainty. Financial conditions have eased since October but remain restrictive.

Canada's economy remains in excess demand and the unemployment rate has reached historic lows. There is growing evidence that the restrictive monetary policy is slowing household spending, and consumption has moderated from the first half of 2022. The housing market has also declined substantially. As the increasing rates continue to work through the economy, spending is expected to slow. The overall slowdown in activity will allow supply to catch up with demand.

Inflation declined from 8.1% to 6.3% in December, reflecting the lower gas prices. However, short-term inflation expectations remain elevated. In addition, improvements in global supply conditions and the effects of higher interest rates are expected to bring CPI inflation down to around 3% in the middle of 2023 and back to the 2% target in 2024. This means don't expect interest rates to decrease until the beginning of 2024.

Rates are increasing due to persistent excess demand putting upward pressure on many prices. However, quantitative tightening continues to complement these increases. If current economic activity remains at current levels, the Bank of Canada is open to taking a breather and interest rates will be on hold for a period of time. However, if there are signs of increased inflation again from future economic reports, the Bank is prepared to continue increasing rates.

The next Bank of Canada announcement will be on March 8, 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 me and we'd be glad to help!

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