Ottawa, Canada – When it comes to the effectiveness of rate hikes in slowing the economy and reducing inflation, Canada seems to be leading the way compared to the US. The Bank of Canada recently announced a 25-basis point cut in policy interest rates, citing easing underlying inflation as the primary reason for the adjustment. While interest rates are being lowered, the bank also mentioned that Quantitative Tightening (QT) will continue as they have already shed a significant portion of the securities acquired during the pandemic.
The target rates for the overnight rate, Bank Rate, and deposit rate were adjusted by the Bank of Canada, signaling a shift in monetary policy to address the changing economic landscape. The bank expressed confidence in inflation moving towards the 2% target, despite challenges such as slower employment growth and wage pressures. Notably, the influx of immigrants in the labor market has impacted per-capita GDP negatively, highlighting the need for a balanced approach to sustain economic growth.
One of the key concerns highlighted by the Bank of Canada is the persistently high shelter price inflation, driven in part by increased demand for rental housing due to the surge in immigration. The bank remains vigilant about the inflation outlook, closely monitoring core inflation, wage growth, and corporate pricing behavior to make informed policy decisions. Governor Tiff Macklem outlined conditions that could lead to further rate cuts, emphasizing the need to maintain a delicate balance between stimulating economic growth and managing inflation.
In a press conference, Macklem pointed out the positive trends in inflation indicators, indicating a gradual easing of inflationary pressures. Factors such as declining CPI inflation and core inflation rates suggest that the current monetary policy is effectively curbing price pressures. The bank’s decision to lower the policy interest rate reflects a greater confidence in the economy’s ability to navigate towards the 2% inflation target sustainably.
The effectiveness of rate hikes in Canada compared to the US raises interesting discussions on mortgage structures and their impact on consumer spending. In Canada, a majority of mortgages are structured as variable-rate or short-term fixed-rate loans, exposing existing borrowers to higher rates and potentially reducing discretionary spending. On the other hand, the US market, dominated by long-term fixed-rate mortgages, presents a different scenario where only new borrowers are affected by rate hikes.
Overall, the Bank of Canada’s proactive approach to managing inflation and supporting economic growth sets a precedent for effective monetary policy implementation. As the economic landscape continues to evolve, maintaining a balance between stimulating demand and controlling inflation will be crucial for sustaining long-term growth and stability.