Bank of Canada Raises Rates

Bank of Canada Raises Rates

As most are aware, the Bank of Canada announced a rise in its target for the overnight rate to 4½%, accompanied by the Bank Rate at 4¾% and the deposit rate at 4½%. The Bank is also continuing its policy of quantitative tightening.

On a global scale, inflation remains elevated and widespread, with decreasing rates in several nations, primarily due to reduced energy costs and improvements in global supply chains. Economies in the United States and Europe have shown resilience, despite earlier expectations of a more significant slowdown outlined in the October Monetary Policy Report (MPR). The sudden removal of COVID-19 restrictions in China has resulted in an upward revision to their growth forecast, potentially affecting commodity prices positively. However, the ongoing Russia-Ukraine conflict introduces significant uncertainty. While financial conditions have eased since October, they remain restrictive, and the Canadian dollar has remained relatively stable against the US dollar.

The Bank's estimation for global economic growth in 2022 is around 3½%, projected to slow to approximately 2% in 2023 and 2½% in 2024, slightly higher than the October projection.

Within Canada, recent economic growth surpassed expectations, with the economy continuing to experience excess demand. Tight labour markets persist, reflected in historically low unemployment rates and challenges in hiring for businesses. Nonetheless, there are signs that the restrictive monetary policy is beginning to dampen activity, particularly in household spending, with a slowdown in consumption growth and a substantial decline in housing market activity. As interest rate effects ripple through the economy, spending on consumer services and business investment is expected to decelerate, and weakened foreign demand may impact exports. This overall slowdown is expected to help align supply with demand.

The Bank estimates that Canada's economy grew by 3.6% in 2022, slightly stronger than the October projection, with growth expected to plateau in mid-2023 before picking up later in the year. The Bank expects GDP growth of approximately 1% in 2023 and around 2% in 2024 is anticipated, aligning closely with the October outlook.

Inflation has shown a decline from 8.1% in June to 6.3% in December, attributed to lower gasoline prices and a moderation in durable goods costs. However, Canadians continue to experience the impact of high inflation in essential household expenses, particularly food and shelter. Short-term inflation expectations remain elevated, but measures of core inflation have begun to recede, indicating a potential peak in core inflation.

The Bank projects a significant decrease in inflation throughout the year, anticipating CPI inflation to reach around 3% in the middle of this year and return to the 2% target in 2024. With persistent excess demand driving upward pressure on many prices, the Governing Council has decided to increase the policy interest rate by an additional 25 basis points. This aligns with the Bank's ongoing program of quantitative tightening to complement the restrictive stance of the policy rate. The Governing Council intends to maintain the current policy rate level while assessing the cumulative impact of interest rate increases, with a readiness to further increase if necessary to bring inflation back to the 2% target, demonstrating its commitment to restoring price stability for Canadians

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