Bank of Canada held its key policy rate at 4.5% today

With the unemployment rate at 5% and inflation at 5.9%, the Bank of Canada held the overnight rate at 4.5% following 8 consecutive rate hikes. In January, the Bank stated that it “expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases”.

A mild recession or perhaps a “soft landing” of the economy (where the economy slows but unemployment remains steady) is expected in the second half of 2023, not long in duration or severity. Rapidly rising interest rates by the central banks in the G7 countries are designed to reduce inflation by a) curbing wage growth and mildly increasing unemployment rates, and b) pushing up borrowing costs. The net effect is to reduce household budgets and business spending thereby curbing the demand for goods and services which has been the central cause of inflation. There is no indication the U.S. Federal Reserve or the Bank of Canada and the other central banks will not continue to raise interest rates until there are clear indications that the rate of inflation is moving toward the 2% target.

According to Deloitte’s 2023 Economic Outlook report: “Despite an expected pause in interest rate increases, mortgage rates will remain elevated until the end of 2023, preventing many prospective homebuyers from entering the market and leading to further declines in home ownership transfer costs,” the report said.

Looking ahead: The Bank of Canada would be poised to reduce overnight rates to spur the general economy likely in 2024. This will have a dramatic effect on real estate market activity with falling interest rates, pent-up buyer demand, massive immigration causing increased demand for housing, and a severe undersupply of housing stock.

The next interest rate announcement is April 12.

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