If you are a Canadian homeowner, borrower, saver, or investor, you might be wondering what the Bank of Canada (BoC) will do with its policy interest rate in October 2023. The BoC is the central bank of Canada and it sets the target for the overnight rate, which is the interest rate at which major financial institutions borrow and lend one-day funds among themselves.
The overnight rate influences other interest rates in the economy, such as the prime rate, mortgage rates, savings rates, and bond yields. The BoC adjusts the overnight rate on eight fixed dates each year, based on its assessment of the economic outlook and inflation pressures.
The next interest rate announcement is scheduled for Wednesday, October 25, 2023. As of October 2023, the overnight rate is 5.00%, which is the highest level since December 2007. The BoC has raised the overnight rate by 0.25% four times in 2023, most recently on July 12, 2023.
The Prime Rate and Its Impact
The prime rate is the interest rate that commercial banks charge their most creditworthy customers, such as large corporations. The prime rate is usually linked to the overnight rate and it influences other lending rates in the economy, such as variable mortgage rates, lines of credit, and personal loans.
The prime rate also affects the returns on some investment products, such as money market funds and guaranteed investment certificates (GICs). As of October 2023, the prime rate in Canada is 7.2%, which is also the highest level since December 2007.
Economic Indicators and BoC's Response
The BoC has been tightening its monetary policy in response to the strong economic recovery from the COVID-19 pandemic and the rising inflation pressures in Canada and globally.
The Canadian economy grew by an annualized rate of 6.5% in the second quarter of 2023 and by an estimated 5.0% in the third quarter of 2023. The unemployment rate fell to 5.2% in September 2023, which is close to its pre-pandemic level. The inflation rate rose to 4.8% in August 2023, which is well above the BoC's target range of 1% to 3%.
Future Outlook and Analyst Predictions
The BoC has indicated that it will continue to raise the overnight rate gradually until it reaches its neutral level, which is the interest rate that is consistent with a balanced economy and stable inflation.
The BoC estimates that the neutral level of the overnight rate is between 2.5% and 3.5%. However, some analysts expect that the BoC will have to raise the overnight rate above its neutral level to contain inflation and prevent overheating of the economy.
Factors Affecting the Interest Rate Outlook for 2023
The interest rate outlook for 2023 will depend on several factors, such as:
- The pace and composition of economic growth in Canada and globally, especially in the United States, which is Canada's largest trading partner.
- The supply and demand conditions in various sectors and markets, such as energy, housing, labor, and commodities.
- The inflation expectations of consumers, businesses, and financial markets, can influence actual inflation outcomes.
- The actions and communications of other central banks, especially the U.S. Federal Reserve, can affect global financial conditions and exchange rates.
Based on the current economic data and projections, there is a high probability that the BoC will raise the overnight rate by another 0.25% to 5.25% on October 25, 2023. This would imply that the prime rate would increase to 7.60% and that variable mortgage rates would also rise accordingly.
However, there is also a possibility that the BoC will pause its rate hike cycle or even cut the overnight rate if there are significant downside risks to the economic outlook or inflation outlook.
If you are planning to borrow or invest money in Canada in October 2023 or beyond, you should keep an eye on the BoC's interest rate announcements and monetary policy reports. You should also compare different interest rates and products from various lenders and financial institutions to find the best option for your needs and goals.