The Bank of Canada Increased the Overnight Rate to 5 Per Cent

Key Insights

Inflation is moving closer to the Bank’s target, but housing is proving rigid. In May, the Consumer Price Index (CPI) increased by 3.4 per cent year-over-year, just off the Bank’s target of 1 to 3 per cent. This increase is significantly driven by the mortgage interest cost index (MICI), which accounted for 0.9 percentage points of the CPI’s increase. In May, the MICI rose 29.9 per cent year-over-year, its largest increase recorded. While interest rate hikes from the Bank have contributed to this, so have home prices which, despite the higher rates, have continued to increase—as indicated by the Canadian Real Estate Association—by 3.2 per cent year-over-year in May when averaged nationally. Given that prices continue to rise nationally, the Bank may have concerns regarding the rigidity of the housing sector and its influence on inflation.

British Columbia’s port strike is creating sizable trade disruption. Since Canada Day, more than 7,000 workers representing over 30 British Columbian ports have begun striking due to issues ranging from pay to contracting out and automation. The cost of the strike is substantial, with an estimated $775 million in trade per day being disrupted, which could impact July’s inflation as imports of consumer goods and exports of raw materials are stalled. The stalling of consumer goods imports may translate to increased prices on available supply as stock becomes scarce (a situation similar historically to the 2021 Suez Canal blockage which led to oil price surges). On the export side, stalled exports may lead to some financial worries for exporters as orders are unfulfilled and business operational capacity is stunted. If financial worries were to become severe due to this, cost-saving measures such as hiring freezes or reducing inefficiencies may be required, which could depress demand for domestic goods and services, and depreciate prices.