The Bank of Canada meets expectations in December and raises its rates 50 bp to 4.25%

The Bank of Canada (BoC) has met expectations at its last meeting in 2022 and has raised its interest rates by 50 basis points, raising them to 4.25% from the previous 3.75%. This is the seventh consecutive rate hike and the highest level reached since late 2007.

BoC Monetary Policy Statement

The Bank of Canada raised its overnight rate target to 4.25% today, with the bank rate at 4.5% and the deposit rate at 4.25%. The Bank is also continuing its policy of quantitative tightening.

Inflation around the world remains high and widespread. Global economic growth is slowing, although it is proving more resilient than expected at the time of the October Monetary Policy Report. In the United States, the economy is weakening, but consumption remains strong and the job market remains overheated. The gradual reduction of global supply bottlenecks continues, although geopolitical events could disrupt progress.

In Canada, GDP growth in the third quarter was stronger than expected and the economy continued to function with excess demand. The Canadian labor market remains tight, with the unemployment rate near record lows. Although commodity exports have been strong, there are increasing signs that monetary policy tightening is holding back domestic demand: Consumption moderated in the third quarter and property market activity continues to decline. Taken together, the data since the October Monetary Policy Report support the Bank’s forecast that growth will essentially stagnate until the end of this year and the first half of next.

CPI inflation held at 6.9% in October, and many of the goods and services Canadians routinely buy saw large price increases. Core inflation remains around 5%. Three-month rates of change in core inflation have eased, an early indicator that price pressures may be losing momentum. Nevertheless, inflation remains too high and short-term expectations remain high. The longer consumers and businesses wait for inflation to be above target, the greater the risk that high inflation will entrench.

Looking ahead, the Governing Council will consider whether it is necessary for the official interest rate to continue rising so that supply and demand balance again and inflation returns to the target. The Governing Council continues to assess to what extent monetary policy tightening is helping to curb demand, how supply problems are being resolved, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the official interest rate. We remain steadfastly committed to reaching the 2% inflation target and restoring price stability for Canadians.

The next monetary policy decision will be announced on January 25, 2023.