On Wednesday the Bank of Canada (BoC) announced its latest rate increase, lifting the overnight policy interest rate by 50 basis points (bps) to 3.75%. Most analysts had predicted a 75bps increase. The lower-than-expected increase represents a continued slowing in the pace of increases since the start of the rate hiking cycle.

The 50bps move suggests the BoC is exercising patience to see the effects of monetary policy working its way through the economy, after initially front-loading rate increases at the start of the cycle. The move also shows a growing confidence that the BoC believes its actions so far are sufficient and will have the intended effect of reigning in inflation.

• The market responded positively in the moments after the rate announcement with a rally in equity and bond prices. The slowing of pace of hikes suggests that the BoC could get to peak rates sooner.
• In its rate statement, the BoC expressed that the effects of the policy rate increase have become evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening. Also, the slowdown in international demand is beginning to weigh on exports. Economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy. The BoC projects GDP growth will slow from 3.25% this year to just under 1% next year and 2% in 2024.
• While policy has had the intended effects in various parts of the economy, the BoC expressed concerns about core inflation. In the last three months, headline inflation declined from 8.1% to 6.9%, primarily due to a fall in gasoline prices. However, price pressures remain broad based, with two-thirds of CPI components increasing more than 5% over the past year.
• While the BoC slowed the pace of hikes, they left room for “policy rate to rise further” as near-term inflation expectations remain high given ongoing demand pressures in the economy. Future rate increases will be influenced by the BoC’s assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.

Inflation and recession talk will likely dominate our news cycle for the near future. If you have any questions about the recent rate increase, or more specific questions about your portfolio, do not hesitate to contact us.

Market Update: By The Numbers (As of Market Close October 24, 2022)

Sources: NEI Investments, Yahoo! Canada Finance, CNBC.com, TD Asset Management