Politics

Bank of Canada raises key interest rate for the 10th time since March 2022

OTTAWA –


The Bank of Canada has raised its policy interest rate again, making the cost of borrowing more expensive.


The 25 basis points hike brings the Bank’s overnight rate to 5 per cent, the highest it’s been since 2001.


In its Monetary Policy Report, the Bank of Canada says the rate increase was necessary to help slow economic growth and reduce core inflation. Three-month rates of core inflation have been higher than the Bank’s expectation hovering around 3.5 per cent to 4 per cent since September 2022.


“The stubbornness of core inflation in Canada suggests that inflation may be more persistent than originally thought,” the Bank’s Monetary Police Report states.


Since the Bank of Canada started raising rates in March 2022 inflation has dropped from a peak of 8.1 per cent last summer to 3.4 per cent in May. This is the 10th interest rate hike since March 2022.


While the Bank acknowledges inflation has been declining due to falling energy prices, easing supply constraints and interest rate hikes, it predicts inflation will remain elevated around 3 per cent over the next year. The Bank says economic growth isn’t slowing as quickly as expected, citing more momentum for demand and stronger than anticipated consumer spending in the first quarter of 2023.


The central bank’s mandate is to keep inflation around 2 per cent and its forecasters are currently predicting inflation will return to that 2 per cent level in the middle of 2025, two quarters later than previously projected.


The Bank’s forecasters say the change to its inflation outlook is due to excess demand, higher than expected housing prices and higher than expected prices for tradable goods.


“The next stage in the decline of inflation towards target is expected to take longer and is more uncertain. This is partly due to elevated services inflation, which can adjust sluggishly, and uncertainty about expected inflation,” the report states.


But since inflation has been above its 2 per cent target for a few years already, and isn’t expected to return to target until 2025, the Bank also warns that “it is possible that inflation expectations will remain higher for longer” and that “progress towards the 2 per cent target could stall, jeopardizing the return to price stability.”


Due to higher interest rates, the Bank expects Canada’s real GDP growth to slow to 1.5 per cent in the second quarter of 2023 and hover around 1 per cent through the second half of 2023 and into the first half of 2024. The Bank expects economic growth will pick up again in 2025 with GDP growth expected to hit 2.4 per cent.


Today’s monetary policy report makes no mention of an interest rate pause leaving the door open to another hike.


The Bank of Canada’s next rate decision comes down Sept. 6th.

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