The Bank of Canada raised its target for the overnight rate by 25 basis points to 1.75 per cent this morning. With this decision, the Bank noted that the overnight rate will need to rise to a neutral stance to achieve its 2 per cent inflation target.
The Bank of Canada is determined to finally “normalize” it’s monetary policy after nearly a decade of low interest rates with the goal of returning the overnight rate to its estimated equilibrium or “neutral” level of between 3 and 3.5 per cent. Policymakers have even discussed dropping their gradual approach, replacing the standard 25 basis point increment rate increases with more accelerated interest rate increases.
The Bank will meet again in December and we expect policymakers will maintain the current overnight rate at this meeting before raising it to 2 per cent in January 2019. As the Bank continues to tighten monetary policy, Canadian mortgage rates are expected to rise, resulting in a 6 per cent qualifying rate by the end of 2019.