As signalled in its previous interest rate announcement, The Bank of Canada maintained its overnight rate at 4.5 per cent this morning. In the statement accompanying the decision, the Bank noted that restrictive monetary policy is weighing on demand and it expects weak economic growth for the next couple of quarters. That weak growth should moderate wage growth in a currently tight labour market and ease competitive pressures on prices, ultimately leading to inflation reaching 3 per cent by the middle of 2023. As for the possibility of future rate increases, the Bank stated that it will continue to assess economic developments and the impact of past interest rate increases and is prepared to increase its policy rate further if needed.
Economic data in Canada has been mixed of late. Labour markets remain very strong while economic growth appears to have somewhat stalled. Inflation, while still high on a year-over-year basis, has come down significantly on a monthly basis with total CPI trending at 2.5 per cent annualized over the past three months and core measures of inflation trending at between 2.5 and 3.5 per cent. Uncertainty as to the direction of the economy has led to significant volatility in bond yields as financial markets grasp for clues on future monetary policy decisions. As a result, 5-year bond yields in Canada (an important benchmark for fixed mortgage rates) have soared back to their previous highs. Consequently, after falling to start the year, fixed mortgage rates have ticked slightly higher. However, we still anticipate that mortgage rates will end the year lower once the full impact of the past year of rate increases is felt on economic growth and inflation.
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