The Bank of Canada today raised the target for the overnight rate to 3¾%, the bank rate to 4% and the deposit rate to 3¾%. The Bank is also pursuing its quantitative tightening policy.
Global inflation remains high and widespread. This reflects the strength of the global recovery from the pandemic, a series of global supply disruptions and rising commodity prices, particularly energy, which have been pushed up by the onslaught of the Russia versus Ukraine. The strength of the US dollar adds to inflationary pressures in many countries. Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world. As economies slow and supply disruptions ease, global inflation is expected to decline.
In the United States, labor markets remain very tight even though restrictive financial conditions are slowing economic activity. The Bank expects no growth in the US economy for most of next year. In the Eurozone, the economy is expected to contract over the next few quarters, mainly due to severe energy shortages. China’s economy appears to have recovered from the recent series of pandemic shutdowns, although lingering challenges in its property market will continue to weigh on growth. Overall, the Bank expects global growth to slow from 3% in 2022 to around 1½% in 2023, and then pick up to around 2½% in 2024. This is a slower pace of growth than expected in the Bank’s July report. Monetary Policy Report (MPR).
In Canada, the economy continues to operate with excess demand and labor markets remain tight. The demand for goods and services always exceeds the capacity of the economy to supply them, which puts upward pressure on domestic inflation. Businesses continue to report widespread labor shortages and, with the economy fully reopening, strong demand has led to a sharp rise in the price of services.
The effects of the Bank’s recent key rate hikes are becoming evident in interest rate sensitive sectors of the economy: real estate activity has fallen sharply and household and business spending is slowing. Moreover, the slowdown in international demand is beginning to weigh on exports. Economic growth is expected to stagnate through the end of this year and into the first half of next year as the effects of rising interest rates ripple through the economy. The Bank expects GDP growth to slow from 3¼% this year to just under 1% next year and 2% in 2024.
Over the past three months, CPI inflation has fallen from 8.1% to 6.9%, mainly due to lower gasoline prices. However, price pressures remain broad-based, with two-thirds of CPI components up more than 5% over the past year. The Bank’s preferred measures of underlying inflation do not yet show significant evidence that underlying price pressures are easing. Short-term inflation expectations remain elevated, increasing the risk that high inflation will take hold.
The Bank expects CPI inflation to decline as higher interest rates help rebalance supply and demand, as price pressures from supply disruptions will fade and the past effects of rising commodity prices will dissipate. CPI inflation is expected to decline to around 3% by the end of 2023, then return to the 2% target by the end of 2024.
Given high inflation and inflation expectations, as well as persistent demand pressures in the economy, the Governing Council expects the policy rate to rise further. Future rate hikes will be influenced by our assessments of how tighter monetary policy is helping to dampen demand, how supply issues resolve, and how inflation and expectations for inflation react. Quantitative tightening complements policy rate increases. We are steadfast in our commitment to restore price stability for Canadians and we will continue to take the necessary steps to achieve the 2% inflation target.
Information leaflet
The next scheduled date for the announcement of the target for the overnight rate is December 7, 2022. The Bank will publish its next comprehensive outlook for the economy and inflation, including the risks associated with the projections, in the MPR on January 25, 2023.
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