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The Bank of Canada Diverging on Rate Hikes

Canada Monthly Mortgage Commentary

December 20, 2022 2 Minute Read

2022 was capped off with 50 bps increases to interest rates by the Federal Reserve, Bank of England and European Central Bank. Alongside these interest rate hikes came guidance that further increases will likely be needed in 2023. Despite each increase raising the odds of a recession in their respective economies, central banks remain committed to curbing inflation.

The Bank of Canada has however taken a slightly different stance and signaled a potential pause in its rate hike cycle. In its December meeting which saw the policy interest rate rise to 4.25%, the Bank of Canada stated it was “considering whether the policy interest rate needs to rise further”. This represents a potential pivot by the central bank following 400 bps of consecutive interest rate hikes since March 2022. While returning inflation to target remains the central bank’s core goal, it acknowledged that tighter monetary policy has already had an impact on the economy. With household consumption already falling and the housing market slowdown well underway, Canada’s economy is expected to see near-zero growth from the end of 2022 through to the first half of 2023. When also considering the typical lag between monetary policy changes and their full impact on an economy, the Bank of Canada is looking to balance the need to tame inflation against the risk of over tightening.   

Historically, interest rates in Canada have largely mirrored those of the U.S., but the current guidance from both central banks imply an upcoming divergence in 2023. With the Federal Reserve looking to hike interest rates to as high as 5.00 to 5.25% by the end of 2023, this could lead to a divergence of up to 100 bps between the Canadian and U.S. economies. However, when factoring in the exceptionally high levels of household debt, some economists believe this spread is warranted given the Canadian economy’s increased sensitivity to higher interest rates.

Economic Highlights:

  • Employment held relatively flat in November 2022, rising by 10,100 jobs and compressing the unemployment rate slightly to 5.1%.
  • Job vacancies fell 3.3% from its record high in Q2 2022 to 959,600 vacant positions in Q3 2022.
  • Preliminary estimates suggest retail sales fell 0.5% in November 2022 following the 1.4% increase in October.


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