Everyone from mortgage borrowers to condo builders has been watching the Bank of Canada closely, looking for signals that the central bank may be coming close to its “terminal” rate -- the point it will determine rates have been raised high enough to combat inflation, thereby ending its aggressive hiking cycle.
However, new commentary from a global policy think tank says more rate hikes are all but assured, to tack on as much as an additional 75 basis points to Canada’s already steep benchmark of 3.25%.
According to the Organisation for Economic Co-operation and Development, the Bank of Canada will raise rates as high as 4.5%in 2023 before it’s through; that’s considerably steeper than the initial 3 - 3.5% expected by economists, and well above the Bank’s inflation growth target of 2%.
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“Inflation has become broad-based in many economies. Tighter monetary policy and easing supply bottlenecks should moderate inflation pressures next year, but elevated energy prices and higher labour costs are likely to slow the pace of decline,” reads the OECD’s report.
“Further interest rate increases are needed in most major economies to anchor inflation expectations and ensure that inflation pressures are reduced durably.”
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The think tank also slashed its forecasts for both the global and Canadian economies, projecting a world-wide slowdown to 2.2% next year, from its initial 2.8% call, and for Canada’s GDP to slow to 3.4% this year and 1.5% next, a 1.1% decline from its original forecast.
States the report, higher interest rates will effectively ease inflation this year and next, but CPI growth will remain uncomfortably high, prompting the need for prolonged tighter monetary policy. Among the G20 economies, it will slow from 8.2% this year to 6.5% next, and decline from 6.2% in the G20 advanced economies this year to 4% in 2023.
Canada’s inflation rate, meanwhile, will linger around the 6.9% mark for the remainder of 2022 before cooling to 4.5% in 2023, “though still higher than the Bank of Canada’s target range of between two and three per cent.” Inflation growth came in at 7% in August, reports Statistics Canada, indicating the measure, while stubbornly high, has peaked.
The Bank of Canada is set to make its next interest rate announcement on Wednesday, October 26, where it is widely expected to implement at least a 0.5% increase. The central bank has hiked interest rates five times since March, raising its trend-setting Overnight Lending Rate by a total of 3%, resulting in a current Prime Rate of 5.45%.
