INSIGHTS

Bank of Canada increases policy rate to 4.25%

REAL ECONOMY BLOG | December 07, 2022

Authored by RSM Canada


The Bank of Canada raised its policy rate by 50 basis points to 4.25% on Wednesday, the seventh consecutive increase since March.

The central bank’s statement noted that there is growing evidence that tighter monetary policy is restraining demand.

In our estimation, the Bank of Canada is nearing the end of a rate hike cycle that we expect will peak at 4.75%. The Federal Reserve, by contrast, will almost certainly lift its policy rate above 5%.

While the Canadian economy has proven resilient amid elevated inflation and rate increases over the past two years, the policy statement noted that there is growing evidence that tighter monetary policy is restraining demand.

That underscores our core forecast that we are nearing a strategic pause in the Bank of Canada’s efforts to restore price stability.

We think that the Bank of Canada, like the Federal Reserve, will adopt a similar lift-and-hold framework in which it engages in a strategic pause early next year to ascertain the impact of past rate hikes.

The Bank of Canada noted it is considering further hikes to curb inflation, which should come as little surprise.

Even though economic headwinds will most likely gather pace through the middle of next year, the central bank retained its tightening bias as it tries to reduce demand, which suggests a rising probability of recession next year.

A slower pace of rate hikes makes sense at this point given the risks of overtightening and triggering a recession.

The Canadian economy is more sensitive to financial conditions than the U.S. economy. Our RSM Canada Financial Conditions Index stands at roughly two standard deviations below neutral, which is a substantial drag on overall economic conditions.

Should the Bank of Canada increase rates above 4.75%, further into restrictive terrain, then it is likely that the Canadian economy will tip into recession by the middle of next year.

Let's Talk!

Call us at (519) 426-5160 (Simcoe) or (519) 842-4246 (Tillsonburg) or fill out the form below and we'll contact you to discuss your specific situation.

  • Topic Name:
  • Should be Empty:

This article was written by Joseph Brusuelas and originally appeared on 2022-12-07 RSM Canada, and is available online at https://realeconomy.rsmus.com/bank-of-canada-increases-policy-rate-to-4-25/.

RSM Canada Alliance provides its members with access to resources of RSM Canada Operations ULC, RSM Canada LLP and certain of their affiliates (“RSM Canada”). RSM Canada Alliance member firms are separate and independent businesses and legal entities that are responsible for their own acts and omissions, and each are separate and independent from RSM Canada. RSM Canada LLP is the Canadian member firm of RSM International, a global network of independent audit, tax and consulting firms. Members of RSM Canada Alliance have access to RSM International resources through RSM Canada but are not member firms of RSM International. Visit rsmcanada.com/aboutus for more information regarding RSM Canada and RSM International. The RSM trademark is used under license by RSM Canada. RSM Canada Alliance products and services are proprietary to RSM Canada.

Good Redden Klosler a proud member of the RSM Canada Alliance, a premier affiliation of independent accounting and consulting firms across North America. RSM Canada Alliance provides our firm with access to resources of RSM, the leading provider of audit, tax and consulting services focused on the middle market. RSM Canada LLP is a licensed CPA firm and the Canadian member of RSM International, a global network of independent audit, tax and consulting firms with more than 43,000 people in over 120 countries.

Our membership in RSM Canada Alliance has elevated our capabilities in the marketplace, helping to differentiate our firm from the competition while allowing us to maintain our independence and entrepreneurial culture. We have access to a valuable peer network of like-sized firms as well as a broad range of tools, expertise, and technical resources.

For more information on how Good Redden Klosler can assist you, please call us at (519) 426-5160 (Simcoe) or (519) 842-4246 (Tillsonburg).

Share This