Bank of Canada raises its policy interest rate by 50 basis points

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Today, the Bank of Canada increased its overnight target rate to 334% while keeping the bank rate at 4% and the deposit rate at 334%. In addition, the bank maintains its quantitative tightening agenda.

The worldwide rate of inflation is high and ubiquitous. This is due to the rapid global recovery from the pandemic, a series of global supply interruptions, and rising commodity prices, particularly for energy, caused by Russia’s invasion of the Ukraine. The strength of the US dollar exacerbates inflationary pressures in a number of countries. The global economy is suffering as a consequence of increasingly rigorous monetary policies aimed to prevent inflation. As economies stagnate and supply disruptions subside, it is anticipated that worldwide inflation will drop.

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Despite the fact that tight financial circumstances inhibit economic development in the United States, labor markets continue to be very competitive. The Bank anticipates a modest pace of economic expansion in the United States for the bulk of the year ahead. In the next three quarters, the euro area’s gross domestic product is anticipated to fall, mostly due to acute energy shortages. Despite the fact that the Chinese economy seems to have recovered from the most recent round of pandemic lockdowns, housing market difficulties will continue to impede growth. The bank anticipates a decline in global growth from 3.0% in 2022 to 1.2% in 2023, followed by a rebound to 2.2% in 2024. This growth is less than projected in the Monetary Policy Report for July (MPR).

The Canadian economy continues to operate in a climate of oversupply, and labor markets remain tight. Domestic inflation is being pushed up by continued demand for goods and services exceeding supply. The complete reopening of the economy has resulted in a substantial increase in service costs, and businesses continue to report severe labor shortages.

Recent increases in the policy interest rate of the Bank of Canada have affected interest-sensitive areas of the economy, such as the property market and consumer and business spending. In addition, the reduction in global demand has started to impact exports. As the consequences of increasing interest rates spread across the economy, it is projected that economic growth will halt between the end of this year and the start of the next year. The bank anticipates a deceleration in GDP growth from 3.4% in 2019 to less than 1% in 2020 and 2% in 2024.

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Inflation, as measured by the CPI, decreased from 8.1% to 6.9% during the previous three months, due mostly to a decline in gasoline prices. Two-thirds of the CPI components grew by more than 5% annually. The preferred measures of the bank’s core inflation do not yet suggest a substantial decline in price pressures. Consistently high near-term inflation expectations increase the likelihood that inflation will continue to climb.

The Bank predicts a drop in CPI inflation as higher interest rates contribute to rebalancing demand and supply, price pressures stemming from global supply disruptions lessen, and the historical repercussions of rising commodity prices fade. It is anticipated that CPI inflation would decline to around 3% by the end of 2023 and then return to the 2% objective by the end of 2024.

The Governing Council forecasts that the policy interest rate will need to increase further in light of growing inflation and inflation expectations, as well as persistent economic demand pressures. Future rate increases will depend on our evaluations of the efficacy of tighter monetary policy in decreasing demand, the resolution of supply difficulties, and the reaction of inflation and inflation expectations. Quantitative tightening accompanies policy rate increases. We are committed to restoring price stability for Canadians and will continue to take all necessary steps to achieve our inflation goal of 2%.

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