Bank of Canada Rate Announcement - July 13, 2022
July 13, 2022 | Posted by: Ken Fadel
The BoC raised its key policy interest rate a full percentage point this morning to 2.5%, the largest increase of this size since 1998. This is the fourth consecutive hike to the BoC’s benchmark rate since March as it continues to battle inflation which surged 7.7% in May compared to a year earlier.
Inflation in Canada is higher and more persistent than the BoC expected in its last policy report and is expected to remain around 8% in the next few months. The war in Ukraine and ongoing supply disruptions continue to be the biggest drivers but domestic price pressures due to excess demand are becoming a bigger factor. Over half of the components that make up the CPI are now rising by at least 5% and the core measures of inflation have now moved up to between 3.9% and 5.4%.
This is by no means a Canada-only issue as many central banks are tightening monetary policy to combat inflation with the resulting tighter financial conditions moderating economic growth. The BoC now expects global economic growth to slow to about 3.5% this year and 2% in 2023 before strengthening to 3% in 2024.
Labour markets in Canada are very tight with a record low unemployment rate, widespread labour shortages, and increasing wage pressures. With strong demand, businesses are passing along higher costs to the end consumer. The BoC expects Canada’s economy to grow by 3.5% this year, 1.75% next, and 2.5% in 2024. Global energy prices are also projected to decline. The BoC’s July outlook sees inflation starting to fall later this year, dropping to about 3% by the end of 2023 and returning to their 2% target by the end of 2024.
The BoC continues to hold the view that interest rates will need to rise further to achieve the 2% inflation target, and the pace of increases will be guided by their ongoing assessment of the economy.
The BoC’s next rate announcement is scheduled for September 7th.