Bank of Canada interest rate decisions

The Bank of Canada's key interest rate is 4.75 per cent.

Canada is experiencing the first period of high inflation in a generation. Over the past two years, goods and service prices have risen rapidly, eroding the purchasing power of the dollar and making life less affordable for Canadians.

Inflation is measured by the annual change in the Consumer Price Index. The Bank of Canada’s overarching goal is keeping this to 2 per cent. CPI inflation hit a four-decade high of 8.1 per cent in June, and it has been trending down since then. It clocked in at 4.4 per cent in April, and the central bank expects it to fall to around 3 per cent by the middle of the year.

The drivers of inflation have changed over time. Prices took off in 2021 when high demand for goods – fuelled by government support cheques and low interest rates – ran into supply problems caused by COVID-19. Russia’s invasion of Ukraine pushed global food and energy prices sharply higher.

Oil prices have dropped since last summer and supply chains have improved, lowering shipping costs and leading to a decline in goods inflation. Today inflation is increasingly driven by rising service prices. This is tied to the tightness in Canada’s labour market and rapid wage growth.

The Bank of Canada uses interest rates to control inflation. By raising rates, the bank makes it more expensive for households and businesses to borrow money and service their debts. This reduces demand for goods and services, hopefully slowing the pace of price increases.

The bank raised its benchmark rate eight times between March 2022 and January 2023 – one of the fastest monetary policy tightening cycles on record.

The bank’s governing council has maintained a “conditional pause” to monetary policy tightening since January, holding the policy rate at 4.5 per cent at its March 8 and April 12 rate decisions. However, they have left the door open to further rate hikes if inflation and economic growth don’t ease as much as expected.

Most Canadians experience interest rates through mortgages, and through various forms of consumer debt, including credit cards, personal loans and auto loans. The prime rate, which commercial banks use to calculate interest rates on variable rate mortgages and home-equity lines of credit, has risen to 6.7 per cent, from 2.45 per cent in 2021. Interest rates for fixed-rate mortgages have also risen.

Interest rate changes work with a lag, often taking 18 to 24 months to have a full impact on economic growth inflation. The most visible impact so far is in the housing market, where sales volumes and prices fell sharply last year. Economic activity more broadly has begun to slow, although less than many economists were expecting last year. The Bank of Canada expects the economic growth to stall through the middle quarters of 2023 and unemployment to rise.