On June 7, 2023, the Bank of Canada raised its target for the overnight rate by 0.25 percentage points to 4.75%, with the Bank Rate at 5% and the deposit rate at 4.75%. It was the first increase since January.
Bank of Canada policy rate, %
Why the Bank moved
- GDP grew 3.1% in the first quarter, stronger than expected, with broad-based consumer spending.
- Housing market activity has picked up, and spending on interest-sensitive goods rose.
- CPI inflation rose to 4.4% in April, the first increase in 10 months.
- The Bank concluded that policy was not restrictive enough to bring inflation sustainably back to 2%.
What it means for Calgary
Variable-rate payments go up again, and qualifying gets a little harder for buyers using variable rates. Calgary’s busy spring was part of the national pickup the Bank mentioned. The next decision is on July 12, 2023.
Why the pause ended
The Bank held the rate in March and April while it assessed the effect of its earlier increases. This time, Governing Council said that based on the accumulation of evidence, monetary policy was not restrictive enough to bring supply and demand back into balance and return inflation sustainably to 2%. Excess demand in the economy looks more persistent than the Bank expected. Quantitative tightening continues alongside the rate increase.
A stronger economy than forecast
First-quarter growth of 3.1% was stronger than expected. Consumption growth was surprisingly strong and broad-based, even after accounting for population gains. Demand for services kept rebounding, spending on interest-sensitive goods increased and, more recently, housing activity has picked up. Higher immigration and participation rates are adding workers, but new workers are being hired quickly, which shows continued strong demand for labour.
Inflation is not falling fast enough
The rise in inflation to 4.4% in April was broad, with prices for many goods and services higher than expected. Goods inflation increased despite lower energy costs, and services inflation stayed elevated. The Bank still expects CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year’s large increases drop out of the annual comparison. But 3-month measures of core inflation have been running at 3.5% to 4% for several months, and the Bank is concerned that inflation could get stuck materially above 2%.
The global picture
Globally, consumer price inflation is coming down, mostly because energy prices are lower than a year ago, but underlying inflation remains stubbornly high. Major central banks are signalling that rates may have to rise further. Growth has essentially stalled in Europe, the US economy is slowing but consumer spending is resilient, and growth in China is expected to slow after a strong first quarter.
What it means for Calgary buyers and owners
Calgary’s spring has been exactly the kind of housing pickup the Bank described: CREB reported a record 3,120 sales in May and a total benchmark of $557,000.
- Variable-rate borrowers: prime rises again. Check whether your payment changes or your amortization gets longer.
- Buyers with a pre-approval: confirm what rate your lender is holding and whether your approval amount changes.
- Owners renewing in 2023: compare fixed and variable offers carefully; the Bank has shown it will raise rates again if inflation does not cooperate.
What the Bank will watch next
Governing Council said it will keep assessing the dynamics of core inflation and the outlook for CPI inflation. In particular, it will evaluate whether excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with reaching the 2% target. The July 12 decision will come with a new Monetary Policy Report, so the Bank will update its forecasts for growth and inflation at the same time.
