Fighting inflation is clearly proving very difficult in the United States. In January, inflation even recorded its first increase in the last four months of decline, ending the first month of the new year 2023 at 6.4%.
Analysts therefore assume that the US Federal Reserve (Fed) will continue its credit tightening policy and raise the key interest rate at least twice more.
They expect two 0.25% hikes, which would take the Fed’s interest rate to around 5.25%. And if you consider that the US base interest rate languished at just 0.25% just under a year ago.
No, but what a disappointment for the Fed’s monks that after raising interest rates by five percentage points, they still haven’t managed to stem high inflation.
With an inflation rate of 6.4%, the United States is still a long way from the Fed’s ultimate target of 2% inflation. The fight promises to be tough at a time when the labor market remains surprisingly buoyant despite the sharp rise in interest rates.
However, many economists continue to believe that inflationary pressures from the credit crunch should eventually ease. They estimate that inflation should slow down significantly from the second half of the year.
In Canada
Will the Bank of Canada follow in the US Federal Reserve’s footsteps if it hikes interest rates again?
Given the close economic and financial ties between Canada and the United States, the risks of the Bank of Canada following the Fed are very high.
Right now, our 4.50% policy rate is slightly 0.25% lower than the US policy rate.
If the Fed were to hike rates to 5.25%, I think the Bank of Canada would be forced to hike rates again. If not, the Canadian dollar could suffer by widening the gap against the US dollar.
patience
Whatever happens to the Bank of Canada’s interest rates in the coming months, it’s a safe bet that retail interest rates will remain at the same levels as they are now throughout the year.
It must be said that they have risen sharply over the last 12 months.
Here is the official retail pricing grid:
- Policy rate: 6.70%
- 1-year mortgage rate: 6.19%
- 3-year mortgage rate: 6.14%
- 5-year mortgage rate: 6.49%
- Term savings from 1 to 5 years: 4% to 4.25%
Of course, interest rates on personal loans and business loans are significantly higher.
Barring an unexpected reversal, such as Canada’s imminent entry into a recession, rates should not start falling again until next year, 2024.
In the wake of an alleged return to the Bank of Canada interest rate cut, of course.
