Bank of Canada to make interest rate announcement on Wednesday ...
Finance industry analysts believe that the BoC will drop the overnight interest rate by either 0.25 or 0.5 per cent
Published Dec 10, 2024 • Last updated 30 minutes ago • 3 minute read
Eight times a year the Bank of Canada makes one of three decisions on overnight interest rates. It either stands pat, raises the rate or lowers it.
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Banks and other financial organizations in turn use that overnight rate to determine their prime rates, and from there, what interest rates apply for mortgages, loans and credit cards.
Here’s what to know about the BoC’s announcement coming Wednesday.
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The link between inflation and interest ratesManaging interest rates is called monetary policy and it is a key way the BoC manages the economy. Interest rates are used to control the rate of inflation – which is the percentage difference between the value of a bundle of goods at one point in time compared to one year prior.
The BoC likes the rate of inflation to be at around two per cent, so that there is economic growth but costs are not rising faster than income growth for average Canadians.
If the rate of inflation is too high it indicates an economy that is growing too swiftly. The BoC’s logic is that an increase in interest rates will slow down the economy, while reducing the rate of interest will stimulate the economy.
What has been happening over the past few yearsWhen COVID-19 arrived in Canada in the spring of 2020 the rate of inflation and the BoC overnight interest rate were both around two per cent and had been that way for several years.
The first thing that happened with COVID was the price of a litre of gas went down. Real estate prices stalled as viewings were cancelled and then the economy slowed way down. This led to the BoC bringing its overnight interest rate down to 0.25 per cent from 1.75 per cent in March 2020 with inflation hovering around zero.
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However, as the pandemic wore on the real estate market picked right up and supply chain issues led to an increase in the price of goods.
This meant it was more expensive to do business and was the start of a general rise in inflation as costs were passed on to consumers.
By February 2022 inflation in Canada was 5.7 per cent and the BoC decided to act, increasing the overnight interest rate to 0.5 per cent.
Inflation continued to rise and peaked in Canada in June 2022 at 8.1 per cent, by which time the BoC had increased the interest rate to 2.5 per cent. As rates rose, inflation fell, but not fast enough and rates continued to rise – peaking at five per cent in July 2023.
In June 2024, with inflation at 2.7 per cent, the BoC began dropping its overnight rate and as of now it is 3.75 per cent.
What happens on Wednesday?Finance industry analysts believe that the BoC will drop the overnight interest rate by either 0.25 or 0.5 per cent on Wednesday.
According to the BMO Canada Economic Outlook released last week, “Since June, (BoC) has cut rates by 1.25 per cent, and we expect another cut during their final interest rate meeting in December, as well as a series of cuts through mid-2025. All told, we expect the overnight interest rate to fall from the current 3.75 per cent to 2.5 per cent by the middle of 2025. If anything, the Bank of Canada may be even more aggressive.”
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Bloomberg Economics is predicting a 0.25 per cent cut to 3.5 per cent on Wednesday.
Data released last Friday showed the jobless rate had climbed to 6.8 per cent — the highest since 2021. That led economists at Scotiabank and Bank of Montreal to join Canada’s four other major lenders in predicting officials will drop the BoC’s overnight lending rate half a per cent to 3.25 per cent.
With files from Bloomberg
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