Toronto 
The Bank of Canada has increased its target for the overnight rate to 5%, with the Bank Rate at 5¼% and the deposit rate at 5%, in a bid to tackle persistent inflationary pressures.
The Bank says it will continue its ongoing quantitative tightening policy.
The central bank, in its statement, says the global inflation appears to be on a declining trend, primarily due to falling energy prices and a decrease in goods price inflation. However, the global economy is facing robust demand and tight labour markets, which continue to exert inflationary pressures, especially in the service sector.
The Bank’s July Monetary Policy Report projects the global economy to grow by around 2.8% this year, 2.4% in 2024, and 2.7% in 2025.
Highlights:
- Economic growth has outperformed expectations in Canada and the US, but growth in China and the Euro area is slowing.
- Canada’s economy showed unexpected strength, with consumption growth at 5.8% in Q1.
- A persistent excess demand is expected in the economy despite anticipated slowdowns in consumer spending due to interest rate hikes.
- The housing market is witnessing a minor revival due to demand outpacing supply, thereby exerting upward pressure on prices.
- The labour market remains tight, with wage growth hovering around 4-5%, despite the increased availability of workers.
- The robust population growth owing to immigration adds both demand and supply to the economy.
Looking ahead, the bank expects Canada’s economic growth to slow, averaging around 1% through the second half of this year and the first half of next year. This suggests a real GDP growth of 1.8% in 2023 and 1.2% in 2024, before picking up to 2.4% in 2025.
Canada’s inflation eased to 3.4% in May, a significant drop from its 8.1% peak last summer. The bank forecasts the Consumer Price Index (CPI) inflation to stay around 3% for the next year before gradually declining to 2% in mid-2025, a slower return to target than initially projected.
With a sustained level of excess demand and high core inflation, the Governing Council decided to raise the policy interest rate to 5% and continue with the quantitative tightening.
The press release reads, “Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation. In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target.”
The Bank pledges to remain steadfast in restoring price stability for Canadians and will continue to closely monitor core inflation, wage growth, and corporate pricing behaviour.
Three additional rate decisions are slated for this year on the dates of September 6, October 25, and December 6.
