The Bank of Canada (BoC) today raised its key rate by 0.25% to 5.0%, stating that it sees it key rate coming back down circa 2025 (a federal election year). The unusual issue about our current BoC regime is that they continue to predict events and timing which traditionally the BoC has stayed away from.
There is much debate in the financial and economic community as to whether the BoC has got it right. There is a perception that the BoC is viewing the Canadian economy much like the U.S. economy, but this is a poor comparison. The U.S. economy is a value-add economy whereas the Canadian economy remains a resource-based economy.
Super high levels of immigration (more than 800,000 immigrants over 2021 & 2022, the largest rate of immigration of all western economies) that the federal government has administered over the past few years has added to inflationary pressures and provided low skill workers to the Canadian economy. These immigration levels have masked the real recession that is occurring.
May 2023 inflation rate was 3.4% vs a year ago when it was upwards of 8%. The BoC rate hikes are obviously already working, further rate hikes will add to consumer cost of living (inflation) as they renew mortgages going forward. If mortgage costs are stripped out of CPI it shows that core inflation is within the target range of 2%.
We do not see how the BoC can continue to raise rates much beyond where we are at without impairing the economy to the point of a long recovery.
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