On Wednesday, the Bank of Canada increased its overnight lending rate for the sixth time this year. The central Bank is aiming to curb inflation. In addition, the Bank of Canada issued a warning that further rate hikes are forthcoming amidst mounting concerns that the hikes could push Canada into recession.
The Bank of Canada increased the rate by 50 basis points to 3.75 percent. Most analysts anticipated a 75-point increase. The increase is a 14-year high but falls short of expectations for another 75 basis point increase. Since March, the Fed has increased interest rates by 350 basis points, one of its quickest tightening cycles ever.
Bank of Canada hikes rates by 3.75%
Statistics Canada reported last week that the Consumer Price Index rose 6.9% in September compared to the same month one year prior. This was a modest decrease from the yearly “headline” inflation rate of 7% recorded in August.
The Bank of Canada predicted earlier that Canada’s economic growth would stagnate later this year and early the following year. As a result, the Bank revised its quarterly projections, which “indicates that a couple of quarters with growth slightly below zero are just as likely as a couple of quarters with minor positive growth.”
Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the governing council expects that the policy interest rate will need to rise further. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2 per cent inflation target.
The Bank of Canada
The Bank stated that additional increases are necessary despite the fact that prior increases have the desired effect of cooling the economy. The Bank of Canada also accepted the prospect of a “technical” recession, characterized by two consecutive quarters of negative GDP growth.
How much further rates rise depends on the effectiveness of monetary policy in reducing demand, the resolution of supply constraints, and the reaction of inflation and inflation expectations.
Governor Tiff Macklem indicated that the Bank of Canada was still far from its target of low, stable, and predictable inflation of 2%. However, the Bank attempted to strike a balance between under- and over-tightening risks.
According to market analysts, the choice to challenge market pricing with a modest shift was presumably influenced by the deteriorating outlook. Moreover, these analysts argue that the Bank of Canada may be becoming more cautious, despite warnings of future hikes mitigating the surprise.
In September, grocery prices continued to rise, increasing by 11.4% annually. Since August 1981, this has been the greatest yearly food inflation rate. It was also the tenth consecutive month that food prices rose faster than the headline CPI number.
The Bank startled onlookers in July by increasing the overnight rate by a whole percentage point to 2.5%. In addition, the Bank increased the interest rate by 25, 50, and 50 basis points in March, April, and June, respectively.
The overnight rate began the year at 0.25 percent, where it had been since March 2020, when the global COVID-19 pandemic was declared, and the Bank lowered it three times in one month.
How do rising interests affect crypto?
By the end of 2022, interest rates will be higher. Consequently, the cryptocurrency market should prepare for a comparable increase in risk aversion. Yes, a decrease in appetite for high-risk, high-return assets, such as cryptocurrency, is typically associated with a rise in interest rates. Theoretically, this should indicate that the cryptocurrency market will face price drops during the course of the year.
Following the March, May, and June meetings of the Federal Reserve, the price of bitcoin decreased by at least 10 percent. There is a definite correlation between Fed rate hikes and crypto market declines, but the decline following the July meeting was less severe.
Nevertheless, with the stock market reacting negatively to recent predictions of rate hikes and the cryptocurrency market becoming increasingly tied to the stock market, the changing macroeconomic outlook could result in a dismal year for cryptocurrencies.
How much of an impact will price increases have? Considering the current market decline, these potential price increases could substantially influence bitcoin and the broader cryptocurrency market. Numerous commentators have cited the Fed’s pessimistic stance as the primary cause of recent market declines.
Simply put, the cumulative effect of these repeated rate hikes may drag down bitcoin and crypto in general, assuring that 2022 will be another lousy market year for cryptocurrencies. No one can predict how much prices will fall, but given that the crypto market fell as much as 89% between December 2017 and December 2018, the worst-case situation might be extremely dire.
In other words, inflation may worsen before it improves, and the Fed, Bank of England, and now Bank of Canada may be compelled to implement more than three rate hikes this year. If so, the implications for crypto might be significant.
