Bank of Canada Rate Announcement - July 12, 2023
July 12, 2023 | Posted by: Ken Fadel
As expected, the BoC just increased its target for the overnight rate 25 bps to 5.00%, a level not seen in 22 years.
While energy and goods inflation continue to slowly ease, robust demand and tight labour markets are causing persistent inflationary pressures in services. Economic growth has been stronger than expected, with the BoC now projecting the global economy to grow by 2.8% this year, 2.4% in 2024 and 2.7% in 2025. Global financial conditions have tightened, as rising bond yields in both North America and Europe signal major central banks may need require further interest rate increases to combat inflation.
Canada’s economy has also been stronger than expected. Consumption growth remains surprisingly strong at 5.8% for the first quarter of 2023. While the BoC expects the cumulative increase in interest rates to slow consumer spending, recent data suggests there remains excess demand in the economy. In the housing market new construction and resale listings are not keeping up with demand adding pressure to prices. While there are signs of more available works in the labour market, conditions remain tight and wage growth sits around 4-5%. At the same time, strong population growth from immigration is both easing the shortage of workers but increasing the demand for housing.
As higher rates continue to work their way through the economy, the BoC expects economic growth to slow to around 1% for the second half of 2023 and the first half of next year. This translates to real GDP growth of 1.8% in 2023 and 1.2% in 2024. Growth is forecasted to pick up again in 2025 to around 2.4%.
Inflation in Canada dropped to 3.4% in May, a substantial fall from its peak of 8.1% last summer. This downward momentum has come more from lower energy prices, and less from easing underlying inflation. Underlying price pressures appear to be more persistent than anticipated. CPI inflation is now forecast to hover around 3% for the next year before gradually declining to 2% in the middle of 2025. The BoC stated “we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target. The Bank remains resolute in its commitment to restoring price stability for Canadians.”
The central bank’s next rate announcement is scheduled for September 6th.