Bank of Canada interest rate decisions (2024)

Inflation is a generalized increase in consumer prices that erodes the purchasing power of money. It’s measured by looking at the Consumer Price Index (CPI), which captures price changes across a broad range of goods and services. The Bank of Canada’s raison d’être is keeping inflation low and stable, and it targets a 2-per-cent annual increase in the CPI.

Over the past three years, Canada – like many countries around the world – has experienced high inflation for the first time in decades. The annual rate of CPI inflation started rising in the spring of 2021 and reached a peak of 8.1 per cent in June 2022.

Inflation has fallen considerably over the past 18 months, in part because higher interest rates have forced some households and businesses to curb their spending. The inflation rate fell to 2.5 per cent in July, the lowest annual inflation rate since March, 2021. But in the final stages of their inflation fight, central bankers are worried about downside risks to the economy and the potential for inflation to overshoot the 2-per-cent target on the way down.

Today, the cost of shelter is the single biggest driver of inflation. This includes mortgage interest costs, which have been pushed higher by the Bank of Canada’s own interest rate hikes, as well as rents. Shelter inflation is being driven in large part by a combination of high demand, due to rapid population growth, and a shortage of housing supply, due to structural impediments to home building.

The Bank of Canada uses interest rates to speed up or slow down the economy in an effort to control inflation. Higher interest rates make it more expensive for individuals and businesses to borrow money and service their debts. This reduces demand for goods and services, hopefully slowing the pace of price increases.

The central bank raised interest rates 10 times between March, 2022 and July, 2023, bringing its benchmark rate to 5 per cent from 0.25 per cent in one of the most aggressive monetary policy tightening campaigns on record. It held the policy rate steady at 5 per cent over the past six rate decisions.

The bank kicked off its long-awaited monetary policy easing cycle in June. – cutting its benchmark interest rate for the first time in four years – followed by two more quarter-percentage-point rate cuts in July and September. The central bank also said that it is now putting more emphasis on downside risks to economic growth, rather than focusing mainly on the risk of a rebound in inflation.

Most Canadians experience interest rates through mortgages and various forms of consumer debt, including credit cards, personal loans and auto loans. The interest rate on both variable-rate and fixed-rate mortgages has risen dramatically over the past two years, making it harder for new buyers to get into the housing market and increasing monthly expenses for existing homeowners when they renew their mortgages.

Higher interest rates also impact the economy as a whole. Canadian economic growth has essentially stalled since the middle of 2023, as consumers have cut spending and businesses have pulled back on investment. Companies have slowed hiring and the rate of unemployment is on the rise.

So far the Canadian economy has avoided an outright recession. But the Bank of Canada expects economic activity to remain weak through the first half of 2024, before picking up in the second half of the year and into 2025.