Thankfully, yes, it is. Inflation fell to 2.8% in June, within the BoC’s target band of 1% to 3%, but ultimately the central bank would like it to reach 2%. And it may be too early to celebrate, because certain goods, such as groceries, remain stubbornly expensive (grocery prices were up 9.1% year-over-year in June), and gas inflation is down (prices fell 21.6% year-over-year in June) simply because prices were so high last year.
How much more financial pain lies ahead? How high could interest rates go in Canada?
The impact of BoC rate hikes so far
When the BoC increases or decreases its interest rate, the banks follow suit. This significantly impacts our financial lives—positively for savers and negatively for debt holders. If you’re a saver, you could benefit from rates on guaranteed investment certificates (GICs) that are currently above 5%. On the other hand, if you’re a mortgage holder, you’ve probably seen or will see your mortgage payments go up. The discounted 5-year fixed mortgage rate jumped from under 1.5% in December 2020 to above 5% in July 2023—a whopping increase of well over 200%. That comes out to a monthly payment increase of around $1,000 on a $500,000 mortgage.
Why it’s tough to make interest rate predictions for Canada
Interest rate predictions are notoriously tricky, because global events—which are always unpredictable—also affect Canada. But generally speaking, inflation and interest rates are cyclical. So, at some point, we should see rates climb back down. Craig Wright, chief economist at RBC, believes that while we may see more rate increases, “zero more hikes are needed” right now. In fact, more hikes may needlessly damage the economy, he says.
But, according to the BoC, Canadians may need to be patient, because economic demand is high, the labour market remains strong and the housing market has picked up. In central-bank-speak, be prepared for the possibility of more rate hikes.
According to Andrew Grantham, executive director of economics at CIBC Capital Markets, “There is a risk of one more 25 [basis point] hike in Q3 this year because… some of the core measures that the Bank prefers still suggest that underlying price pressures are rising at a pace above their target band.”
While the BoC’s commentary and economic forecasts are useful in understanding the state of the economy, it may be prudent not to base financial decisions solely on them, because economic surprises are par for the course. This is evident from recent history as inflation—which was a result of very low COVID-time interest rates—has been more persistent than the BoC initially anticipated. Similarly, some economists believed the rate hikes of December 2022 and January 2023 would be the last ones for this cycle—which they weren’t.
In economies with an independent central bank—like Canada—experts don’t always agree with the bank’s rate decisions; central banks are inclined to keep the door open to future rate hikes, even as businesses and residents hope for stable or lower rates. This can lead economists to erroneously forecast the end of a rate hike cycle earlier than it actually happens. Could that be the case this time?
How the Bank of Canada’s interest rate affects you
Could we return to 1980s-level inflation in Canada?
High inflation over the past year has led some people to wonder whether we’re in for a repeat of the 1980s, when inflation reached about 12.5% in 1981. That year, the BoC’s benchmark rate inched above 20%, and the prime rate neared 23%. How high were mortgage rates? Above 21% in late 1981. But can we realistically revisit those inflation and interest rate heights?