The Bank of Canada (BoC) delivered a shocker today with its biggest interest rate increase in over 20 years.
The central bank announced a hike of 1%, the biggest since 1998, bringing the interest rate to 2.5%. The move is aimed at lowering inflation.
Inflation in Canada is higher and more persistent and will likely remain around 8% in the next few months, BoC said in an online statement. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent.
“Many central banks are tightening monetary policy to combat inflation, and the resulting tighter financial conditions are moderating economic growth,” the statement said. The Bank now expects global economic growth to slow to about 3.5% this year and 2% in 2023 before strengthening to 3% in 2024.
The central bank expects Canada’s economy to grow by 3.5% in 2022, 1.75% in 2023, and 2.5% in 2024. Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. “This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures,” BoC stated. “Global energy prices are also projected to decline.”
The July outlook has inflation starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024.
The Bank estimates that GDP grew by about 4% in the second quarter. But growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.
“The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation,” the statement continued. “The Governing Council is resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.”