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Bank of Canada Rate Announcement - October 26, 2022

October 26, 2022 | Posted by: Ken Fadel

The BoC has announced a further 50 bps hike to its benchmark rate today, marking a sixth consecutive increase as it continues to aggressively target inflationary pressures.  The rate now sits at 3.75%, 350 bps higher than it stood in March of this year.

Inflation around the world remains high and broadly based. This reflects strength in the global recovery from the pandemic, global supply disruptions and elevated commodity prices aggravated by the attack on Ukraine.  Overall, the Bank projects global growth will slow from 3% in 2022 to about 1.50% in next year, and then increase up to about 2.50% in 2024.

In Canada, the economy is still operating in excess demand as labour markets remain tight. The demand for goods and services continues to outpace the economy’s ability to supply them, placing upward pressure on inflation.

The effects of recent policy rate increases by the Bank are becoming evident as housing activity has dampened sharply and spending by households and businesses alike is softening.  Domestic economic growth is expected to stall through the end of 2022 and the first half of next year as the effects of higher interest rates continue to make their way through the economy. The BoC projects GDP growth will drop from 3.25% this year to just under 1.00% next year and 2% in 2024.

In the last quarter, inflation has declined from 8.1% to 6.9% mostly due to a drop in gasoline prices. Price pressures however remain broadly based as two-thirds of CPI components have increased more than 5% over the past year.  The BoC expects inflation to ease as higher interest rates contribute to a balancing of supply and demand, global supply disruptions fade, and the effects of higher commodity prices dissipate. Inflation is projected to decline to about 3.00% by the end of next year, and then return to the Bank’s 2% target by the end of 2024.

Given current inflation and near-term expectations, the BoC expects that further increases to the policy interest rate will be required.  They have made it abundantly clear that they are resolute in their commitment to restore price stability to achieve the 2% inflation target.  Most economists however believe that any further significant increases would risk triggering a significant recession in 2023.

The BoC is scheduled to make its final announcement on its benchmark rate for 2022 on December 7th.

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