The Bank of Canada has raised its policy interest rate by 75 basis points, increasing its target for the overnight rate to 3.25% with the bank rate at 3.5% and the deposit rate at 3.25% as the bank continues its policy of quantitative tightening.
The global and Canadian economies are evolving broadly in line with the bank’s July projection as the effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices, according to the Bank of Canada.
“Global inflation remains high and measures of core inflation are moving up in most countries," the bank said in a statement. "In response, central banks around the world continue to tighten monetary policy. Economic activity in the United States has moderated, although the US labour market remains tight. China is facing ongoing challenges from COVID shutdowns. Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen."
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In Canada, consumer price index (CPI) inflation eased in July to 7.6% from 8.1% because of a drop in gasoline prices. However, inflation excluding gasoline increased and data indicates a further broadening of price pressures, particularly in services.
The bank’s core measures of inflation continued to move up, ranging from 5% to 5.5% in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched, according to the bank.
Canada’s GDP grew by 3.3% in the second quarter. While this was somewhat weaker than the bank had projected, indicators of domestic demand were very strong – consumption grew by about 9.5% and business investment was up by close to 12%.
According to the Bank of Canada, with higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic. The bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy in Canada begins to bring demand more in line with supply.
Given the outlook for inflation, the bank’s governing council still judges that the policy interest rate will need to rise further, noting that quantitative tightening is complementing increases in the policy rate.
“As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target," the bank said. "The governing council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target."
The next scheduled date for announcing the overnight rate target is October 26.
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