How High Will Canadian Interest Rates Go in 2024?

Canada's economic landscape is ever-evolving, and one crucial aspect that often grabs the spotlight is the movement of interest rates. 

As we enter 2024, the forecast for Canadian interest rates is a topic of interest among economists, businesses, and individuals.

Understanding the intricacies of interest rate dynamics in Canada requires a comprehensive analysis of various factors, from economic indicators to government policies and market expectations. 

What is Canadian Interest Rates?

Canadian interest rates refer to the cost of borrowing money set by the Bank of Canada. It's like the price you pay for borrowing money from a bank. 

When interest rates are low, it's cheaper to borrow, which can encourage spending and investment. 

But when the next rate hike in Canada, borrowing becomes more expensive, which can slow down spending and control inflation. 

These rates affect various aspects of our lives, from mortgages to credit cards, so it's essential to understand how they work.

Right now, you can find a rate of 7.2% on all digital platforms. This rate is also known as the prime rate Bank of Canada or prime lending rate. It's set by major banks in Canada. 

They decide this rate every year, and it affects things like loans and lines of credit. So, when you borrow money or use credit, this rate determines how much interest you'll have to pay back.

Why Do Rates Change?

There are a few reasons, but the main one is inflation. Inflation is the fancy term for how much more expensive things get over time. 

The Bank of Canada aims to maintain inflation at a healthy level of approximately 2%. If the inflation rate exceeds the target, the bank increases interest rates to stabilize the economy.

It makes borrowing more expensive, encouraging people to spend less, which slows down inflation.

Bank of Canada Interest Rate Date

On July 12, the Bank of Canada raised its key interest rate to 5%, hitting this mark for the first time since April 2001. It followed a previous increase in June when the rate was raised to 4.75%. 

Before that, the rate had stayed steady at 4.5% since January. These rate hikes were aimed at controlling inflation, which peaked at 8.1% in June 2022.

The Bank's goal is to bring inflation back down to its target of 2%. As of January 2024, inflation had dropped to 2.9%, still above the target but lower than the peak in June 2022. 

While inflation pressures are easing, the Bank points out that shelter costs are still a significant factor contributing to inflation being above target. 

The Bank anticipates that inflation will hover around 3% in the first half of the year before gradually easing, ultimately returning to the 2% target in 2025.

How are Interest Rates Determined in Canada?

Interest rates in Canada are determined primarily by the Bank of Canada, the country's central Bank. 

The Bank of Canada regularly assesses various economic factors to decide whether to raise, lower, or maintain interest rates. 

These factors include:

1. Inflation: The Bank of Canada aims to keep inflation within a target range, typically around 2%. If inflation is rising above this target, the Bank may increase interest rates to down spending and investment, which can help stabilize prices.

2. Economic Growth: Strong economic growth can sometimes lead to inflationary pressures. In such cases, the Bank of Canada might raise interest rates to prevent the economy from overheating.

3. Employment: The level of employment and job creation also influences interest rate decisions. Low unemployment rates signal a strong economy, potentially leading to higher interest rates to prevent excessive borrowing and spending.

4. Global Economic Conditions: Canada's economy is interconnected with the global economy. Events such as changes in international trade, geopolitical tensions, or fluctuations in commodity prices can affect interest rate decisions.

5. Financial Stability: The Bank of Canada also considers the stability of the financial system when setting interest rates. This includes monitoring risks in the housing market, the banking sector, and overall credit conditions.

Based on these factors and other economic indicators, the Bank of Canada's Governing Council meets regularly to assess the current economic situation and make decisions regarding the key policy interest rate, also known as the overnight rate.

The Bank of Canada Is Holding Steady For Now

The recent increase in interest rates caught some off guard, especially considering that it usually takes about 18 months to fully see the effects of previous rate hikes on the economy. 

The fact that the Bank kept the rate at 4.50% for such a brief period added to the surprise.

It remains to be seen whether additional increases will have a greater impact on inflation. However, in the meantime, Canadians are likely to feel even more financially strained.

Final Thought 

Interest rate adjustments are decisions made by the Bank of Canada in response to various economic signals and factors. 

Factors such as inflation, a strong economy, healthy employment levels, and stable global economic conditions are key influencers in the Central Bank's choice to rate hikes in Canada. 

When these economic indicators show signs of weakening, central banks employ strategies to regain control. One such strategy is to lower interest rates. 

Typically, the Bank of Canada advocates for reducing interest rates when it detects a rapid increase in inflation and economic pressures.