The Bank of Canada gives another turn of the screw and raises the key rate to 3.75%

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The Bank of Canada tightens the screw again and raises the key rate to 3.75%

Variable rate mortgages, line of credit, auto loan rates: you'll need to dip more into your portfolio today.

The Bank of Canada has announced a sixth rate hike this year.

The Bank of Canada announces a sixth straight increase in the key rate, by 0.50 percentage points, to bring it to 3.75%.

The country's central bank is trying to months of calming inflation and bringing it back to an annual range of 1% to 3%.

Inflation around the world remains high and widespread, says the Bank from Canada. The strength of the global recovery from the pandemic, global supply disruptions and high commodity prices – especially energy – are driving the rise.

The monetary tightening measures taken to control inflation are also weighing on economic activity around the world. It is expected to decline as economies slow and supply disruptions ease, the central bank said.

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In an interview with RDI, economist Daniel Denis recalled that these increases were expected.

The Bank was expected to reach 4% around spring, he said.

But the economist wants to be reassuring, however.

“Perhaps it's small consolation that the rate increases are more behind us than ahead of us.

— Daniel Denis, Economist

Today a lot of people were expecting a 0.75% hike, the Bank was up 0.50% , he points out. I think the Bank is beginning to be sensitive to the impact of its policy.

The Bank paints an overall picture of the state of the world's economies estimating that growth in the US economy is expected to be near zero for most of next year. Labor markets remain under pressure, although tight financial conditions are dampening economic activity.

Due to the slowdown in international demand, growth is expected to stagnates through the end of this year and into the first half of 2023 as the effects of higher interest rates spread through the economy.

The Bank expects GDP growth to slow to nearly 1% next year and 2% in 2024.

In Canada, the economy remains in a situation of excess demand and the labor markets also remain tight, notes the Bank.

The demand for goods and services still exceeds the ability of the economy to meet them and thus exerts upward pressure on inflation in the country. Businesses are still reporting widespread labor shortages, and since the economy fully reopened, strong demand has led to soaring prices for services, it says.

The effects of the series of key interest rate hikes are beginning to be felt in various sectors, particularly the housing market. It is falling sharply, and household and business spending is moderating.

In Europe, we should see a contraction in the coming months, mainly due to acute energy shortages.

The economy seems to have recovered in China after the recent confinements aimed at containing the pandemic, but the challenges facing the real estate market will continue to weigh on growth, notes the Bank of Canada, which forecasts a slowdown in global growth. It will increase from 3% in 2022 to around 1.5% in 2023, before rising to around 2.5% in 2024.

Food prices continue to rise.

The consumer price index has shown a slight decline in recent months. While inflation on an annual basis jumped from 8.1% in June, it stood at 7.6% in July, 7% in August and 6.9% in September.

It was the price of food sold in stores that drove inflation up in September. Over one year, their price has jumped by 11.4%, unheard of in more than 40 years.

This situation convinced the Competition Bureau to launch a study on price gouging in the grocery industry on Monday.

In-store food prices jumped 10.8% in August compared to the same period a year ago, according to Statistics Canada.

In an early October speech to the Halifax Chamber of Commerce, Bank of Canada Governor Tiff Macklem warned that further interest rate hikes will be needed to rein in inflation.

The governor said, in hindsight, that the central bank had been too optimistic in saying that high inflation was likely to be temporary.

The challenges facing the real estate market will continue to weigh on growth, notes the Bank of Canada.

In testimony before the Senate Banking, Trade and Economics Committee, former Bank of Canada Governor Mark Carney said on October 20 that a global recession was likely and that it would be difficult for Canada to avoid a similar economic downturn.

Canadian Deputy Prime Minister and Minister of Finance Chrystia Freeland acknowledged last week that the economy was set to slow over the next few months.

In an economic study published Monday, Desjardins writes that the Canadian economy continues to show signs of weakness. As the Bank of Canada is expected to raise its policy rate by 100 basis points by the end of the year to control still very high inflation, interest rate sensitive sectors are likely to continue to dampen GDP growth real, says Desjardins chief economist Jimmy Jean.

While Desjardins forecasts real GDP growth in Canada of 3.2% this year, the cooperative estimates that the Canada's economy will tread water in 2023.

Jimmy Jean and his team expect the Bank of Canada's key interest rate to stand at 4.25% by the end of the year .

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