The The Bank of Canada has met market expectations by announcing a 50 basis point hike in its interest rates, from the previous 1% to the current 1.5%.its highest level since January 2020. This is the third consecutive rate hike meeting.
The Bank of Canada has today increased its target for the prime rate to 1.5%, with the bank rate standing at 1.75% and the deposit rate at 1.5%. The Bank also continues with its quantitative adjustment (QT) policy.
Inflation around the world and in Canada continues to rise, driven largely by rising energy and food prices. In Canada, CPI inflation reached 6.8% in April, well above the bank’s forecast, and is likely to rise further in the short term before it starts to ease. As input price pressures feed through to consumer prices, inflation continues to widen, with measures of core inflation ranging between 3.2% and 5.1%. Nearly 70% of CPI categories now show inflation above 3%. The risk that high inflation will consolidate has increased. The entity will use its monetary policy instruments to return inflation to the target and keep expectations well anchored.
The rise in global inflation comes as the economy slows. The Russian invasion of Ukraine, China’s COVID-related lockdowns and ongoing supply disruptions are weighing on activity and fueling inflation. The war has increased uncertainty and is putting further upward pressure on the prices of energy and agricultural products. This is holding back prospects, especially in Europe. In the United States, private domestic demand remains strong, despite the economy contracting in the first quarter of 2022. The strength of the US labor market continues, and wage pressures are intensifying. Global financial conditions have tightened and markets have been volatile.
Canadian economic activity is strong and the economy is clearly running on excess demand. National accounting data for the first quarter of 2022 showed GDP growth of 3.1%, in line with the Bank’s April Monetary Policy Report (IPM) projection. Job openings are up, businesses report widespread labor shortages, and wage growth has picked up and expanded in all sectors. Housing market activity is moderating from exceptionally high levels. With Canadian consumer spending remaining strong and exports expected to strengthen, growth in the second quarter is expected to be strong.
Given that the economy has excess demand and that inflation remains well above target and is expected to increase in the short term, the Governing Council still considers that interest rates should continue to rise. The official interest rate remains the Bank’s main monetary policy instrument, while the quantitative adjustment acts as a complementary tool. The pace of further increases in the official interest rate will be guided by the bank’s ongoing assessment of the economy and inflation, and the Governing Council stands ready to act more forcefully if necessary to deliver on its commitment to reach the 2% inflation target.
Source: Fx Street