The Bank of Canada announced today an increase in its target for the overnight rate to 5%, with the Bank Rate at 5¼% and the deposit rate at 5%. This move comes as part of the Bank's ongoing policy of quantitative tightening, aimed at combating persistent inflationary pressures.
- 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%.
- The Bank is continuing its policy of quantitative tightening to combat persistent inflationary pressures.
- Despite easing global inflation, robust demand and tight labour markets continue to exert inflationary pressures, particularly in the service sector.
- Economic growth has been stronger than expected, especially in the United States, while growth in the euro area has stalled and China's economic growth is softening.
- Canada's economy has also been stronger than expected, with a surprising 5.8% growth in consumption in the first quarter.
- The Bank expects economic growth to slow, averaging around 1% through the second half of this year and the first half of next year.
- Inflation in Canada eased to 3.4% in May, a substantial drop from its peak of 8.1% last summer. However, underlying price pressures appear to be more persistent than anticipated.
- The July Monetary Policy Report (MPR) projection forecasts CPI inflation to hover around 3% for the next year before gradually declining to 2% in mid-2025.
- In light of these factors, the Governing Council decided to increase the policy interest rate to 5%.
- The Bank remains committed to restoring price stability for Canadians and will continue to assess the dynamics of core inflation and the outlook for CPI inflation.
Despite easing global inflation due to lower energy prices and a decline in goods price inflation, robust demand and tight labour markets continue to exert inflationary pressures, particularly in the service sector. Economic growth has outperformed expectations, especially in the United States, where consumer and business spending has shown surprising resilience. However, growth in the euro area has stalled, and China's economic growth is softening after a surge in early 2023.
The Bank's July Monetary Policy Report (MPR) projects global economic growth of around 2.8% this year, 2.4% in 2024, and 2.7% in 2025.
Canada's economy has also been stronger than expected, with a surprising 5.8% growth in consumption in the first quarter. Despite expectations of a slowdown in consumer spending due to cumulative interest rate increases, recent data suggests more persistent excess demand in the economy. The housing market has also seen some pickup, with lagging new construction and real estate listings adding pressure to prices.
The Bank expects economic growth to slow, averaging around 1% through the second half of this year and the first half of next year, implying real GDP growth of 1.8% in 2023 and 1.2% in 2024. The economy is expected to move into modest excess supply early next year before growth picks up to 2.4% in 2025.
Inflation in Canada eased to 3.4% in May, a substantial drop from its peak of 8.1% last summer. However, underlying price pressures appear to be more persistent than anticipated, with businesses increasing their prices more frequently than normal.
The July MPR projection forecasts CPI inflation to hover around 3% for the next year before gradually declining to 2% in mid-2025. This is a slower return to target than was forecast in the January and April projections. The Bank remains concerned that progress towards the 2% target could stall, jeopardizing the return to price stability.
In light of these factors, the Governing Council decided to increase the policy interest rate to 5%. The Bank remains committed to restoring price stability for Canadians and will continue to assess the dynamics of core inflation and the outlook for CPI inflation.
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