The Bank of Canada hiked rates by 25 basis points to 0.50%, opening the door to industrywide uncertainty after a long period of stable deposits.
The move, which was widely anticipated and expected to be the first of several increases this year, is likely to highlight the varying positions among industry players. While the industry as a whole continues to show excess liquidity, some financial institutions are starting to anticipate the need to gather deposits.
A recent bump in real-estate lending will make deposits even more valuable than before – and potentially scarce – in coming months. (Bloomberg ranks Canada as the world’s second most overheated housing market, ranking only below New Zealand.)
The upshot for financial providers is to remember that your competitors and customers don’t all look alike. Some customers will chase higher rates and some institutions will be forced to offer them. Understanding broader market moves is equally critical. With each player reacting in different ways, it is important to use competitive intelligence to help provide proactive response rather than late reaction.
The BoC’s increase comes amid growing financial volatility due to the war in Ukraine. As a result, future actions by the central bank are less clear now than they were just a few weeks ago. At the same time, however, additional hikes may be forthcoming as central bankers have acknowledged that inflation may prove to be persistent. The consumer price index increased 5.1% in January from a year earlier, representing the highest level since 1991.
Meanwhile, the U.S. Federal Reserve this month is expected to raise rates for the first time since 2018 amid growing global concern about rising inflation. Some now expect the Fed to raise rates seven times in 2022, a marked increase from recent expectations.
Scenario planning, therefore, will be critical. This can help keep banks on the front foot, allowing for proactive rather than reactive response and maximizing the potential of success.