The Bank of Canada (BOC) said its 50 basis point interest rate hike today is working to achieve a 2% inflation target and will calm the Canadian economy by restoring price stability.
The BOC also increased its target for the overnight rate to 3.75%, with the bank rate at 4% and the deposit rate at 3.75%. The bank said it is also continuing its policy of quantitative tightening. This is the sixth time in a row this year Canada’s central bank has raised rates.
In a statement, the BOC said its decision was influenced by global inflation, the strength of the US dollar, and continuing supply disruptions and elevated commodity prices, particularly for energy.
READ: Central bank preview: ECB set to hike interest rates, Bank of Japan expected to stand pat
“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 come down,” the BOC wrote.
Over the last three months, Canada's annual inflation rate dropped from 8.1% to 6.9%, largely due to a decrease in the price of gasoline. However, the cost of groceries climbed 11.4% in September from a year ago, according to Statistics Canada.
In reaction, the Toronto Stock Exchange (TSX) rose by 1.7% at 19,412, while the TSX Venture Exchange rose by 1.1% to 603 points by midday.
Michael Hewson, chief market analyst at CMC Markets UK, said the Bank of Canada raised rates by a less than expected 50 basis points to 3.75%, in a move that suggests central banks are waking up to the possibility that too aggressive rate rises could do more harm than good.
“It’s also got markets asking the question, could the Fed follow suit next week after another poor set of housing numbers from the US?” Hewson wrote in a report, adding that Canada's housing market is also vulnerable to higher rates. "This is likely to have played into today’s 50 bps decision along with weak business sentiment."
The BOC said the Canadian economy continues to operate in excess demand and that labour markets remain tight.
“The demand for goods and services is still running ahead of the economy’s ability to supply them, putting upward pressure on domestic inflation. Businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services,” according to the central bank.
The effects of recent policy rate increases are more evident in interest-sensitive areas of the economy, as housing activity has retreated sharply, and spending by households and businesses is softening, according to the central bank.
The BOC said it projects gross domestic product growth will slow from 3.25% this year to just under 1% next year and 2% in 2024.
“We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target,” the BOC wrote.
--Updates with new broker comment, market reaction--
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