The Bank of Canada (BOC) raised its target for the overnight policy rate by a full 1% percentage point today bringing the overnight rate to 2.5%. In its press release this morning, the BOC stated the following key points: - Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent.
- The Bank is particularly concerned that inflation pressures will become entrenched. Consumer and business surveys have recently suggested that inflation expectations are rising and are expected to be higher for longer. Wage inflation has accelerated to 5.2% in the June Labour Force Survey and the unemployment rate has fallen to a record-low 4.9%.
- Central banks worldwide are aggressively hiking interest rates, and growth is slowing. In the United States, high inflation and rising interest rates contribute to a slowdown in domestic demand. China's economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile.
- Further excess demand is evident in the Canadian economy. With strong demand, businesses are passing on higher input and labour costs by raising prices. The BOC estimates that GDP grew by about 4% in the second quarter. Growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.
- According to the BOC, economic activity will slow as global growth moderates, and tighter monetary policy works its way through the economy. This combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.
Bottom Line Today's Bank of Canada reports confirmed that the Governing Council continues to judge that interest rates will need to rise further and the pace of increases will be guided by the Bank's ongoing assessment of the economy and inflation. The BOC stated that it is resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target. Govenor Macklem said he expects the BOC to hike the target to 3% or slightly higher. Before today's actions, markets had expected the yearend overnight rate at 3.5%. |
