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The Bank of Canada’s key policy interest rate, the target for the overnight rate, is now 425 basis points higher than in early March 2022 (0.25 to 4.5 percent). The sharp increase has led to a perception interest rates are now high and some puzzlement that has not dampened economic activity more. But are interest rates now high? That depends on the interest rate and period used for a comparator.

Relative to March 2022, and indeed almost any time from 2008 to early 2020, interest rates are now much higher. That is true for the Bank of Canada’s policy rate as well as for bond yields. But the increase in bond yields is much less than for the bank’s rate with yields on 2, 5 and 10-year bonds rising 201, 143 and 107 basis points, compared to 425 basis points for the Bank’s policy rate. None of these rate increases mean, however, that interest rates are now high as relative to other historical periods, rates were especially low 2008 to 2022.

For an alternative base period for comparison, consider February 4, 1998. The Bank of Canada’s target for the overnight rate was 4.75 percent, 25 basis points higher than today. In the key respects the Bank of Canada monitors, the economy was well balanced. The Bank estimated there was little gap between actual and potential output. The CPI rate of inflation was 1.6 percent in both 1997 and 1998. A key distinction between then and now is in bond yields. Whereas 2 to 10-year yields are now around 3 percent, they were around 5 percent in 1998.

The bottom line? Interest rates are up sharply from levels prevailing 2008 to early 2022 but less for bond yields than for the Bank’s policy rate. Viewed across the term structure, interest rates are lower now when the Bank of Canada is trying to rein in inflation, than in the late 1990s when the economy was in balance.

From a longer historical perspective, interest rates should not perhaps be considered to be particularly high now. That perspective may explain in part why economic activity and inflation have not been dampened more to date.