The Bank of Canada raises interest rates by 25 basis points and continues quantitative tightening

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The Bank of Canada today raised its overnight lending rate target to 4½%, with the policy rate set at 4¾% and the deposit rate at 4½%. The bank also continues its policy of quantitative tightening.

Global inflation remains high and broad-based. Inflation is slowing in many countries, largely due to lower energy prices and improvements in global supply chains. In the US and Europe, economies are slowing but are proving more resilient than expected at the time of the Bank’s October issue Monetary policy report (MPR). China’s sudden lifting of COVID-19 restrictions has led to an upward revision of China’s growth forecast and poses an upside risk to commodity prices. Russia’s war against Ukraine remains a significant source of uncertainty. Financing conditions are still tight but have eased since October and the Canadian dollar has remained relatively stable against the US dollar.

The bank estimates that the global economy grew by around 3½% in 2022 and will slow to around 2% in 2023 and 2½% in 2024. This forecast is slightly higher than in October.

In Canada, recent economic growth has been stronger than expected and the economy remains in excess demand. Labor markets remain tight, with the unemployment rate near historic lows and companies reporting continued difficulties in finding workers. However, there is growing evidence that the tightening of monetary policy is holding back activity, particularly household spending. Consumption growth has slowed since the first half of 2022 and housing market activity has slowed significantly. As the impact of rate hikes continues to impact the economy, spending on consumer services and business investment is likely to slow. Meanwhile, weaker external demand is likely to weigh on exports. This general reduction in activity will allow supply to catch up with demand.

The bank estimates that Canada’s economy will grow 3.6% in 2022, slightly stronger than forecast in October. Growth is expected to slow by mid-2023 and resume later in the year. The bank expects GDP growth of around 1% in 2023 and around 2% in 2024, little changed from the October outlook.

Inflation fell to 6.3% in December from 8.1% in June, reflecting lower gasoline prices and, more recently, a decline in durable goods prices. Despite these advances, Canadians are still feeling the pinch of high inflation on their essential household expenses, with persistent increases in food and housing prices. Short-term inflation expectations remain high. The year-over-year core inflation reading is still around 5%, but the 3-month core inflation reading has eased, suggesting that core inflation has peaked.

Inflation is expected to decrease significantly this year. Lower energy prices, improving global supply conditions and the impact of higher interest rates on demand are likely to drive CPI inflation to around 3% by mid-year and back to the 2% target by 2024.

With continued excessive demand putting further pressure on many prices, the Governing Council of the ECB decided to raise interest rates by another 25 basis points. The bank’s ongoing program of quantitative tightening complements the hawkish policy stance. If economic developments move broadly in line with the MPR’s outlook, the Governing Council expects to keep interest rates on hold while assessing the impact of cumulative rate increases. The Governing Council is ready to raise interest rates further if necessary to bring inflation back to the 2% target and remains firm in its commitment to restore price stability to the Canadians.

information note

The next scheduled date for the overnight target announcement is 8 March 2023. The Bank will publish its next full outlook for the economy and inflation, including risks to – projection, in the MPR on 12 April 2023.


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