Canada’s central bank raised its benchmark rate from 1.5% to 2.5% to tackle inflation, which is “higher and more persistent than the Bank expected”, it said on Wednesday.
The Bank of Canada points out that inflation is high and spreading due to excess demand in the economy. It stood at 7.7% in May, a record in almost 40 years. The institution has also announced that it will continue its quantitative tightening policy.
According to the Bank of Canada, the consumer price index is likely to remain around 8% over the next few months and will start to come down later this year to around 3% at the end of next year and return to the target of 2% at the end of 2024.
This is a colossal movement, as Royce Mendes, economist at Desjardins, recalling in a note that the magnitude of the increase in the key rate is the largest since 1998 and that the level reached is the highest since 2008.
Inflation in Canada is linked to the Russian invasion of Ukraine, the persistence of supply disruptions in the world in particular linked to Covid-19, but also increasingly to domestic pressures on prices.
Labor markets are stretched: the unemployment rate has never been so low, labor shortages are widespread and pressures on wages are intensifying, further lists the institution.
The unemployment rate reached in June, in fact, a historically low level in the country, 4.9%.
That same month, the central bank raised its rate from 1% to 1.5%.
This time, the one-point increase in the key rate is higher than anticipated by the market. According to the Bank, inflation remains too high and it believes that a return to 2% inflation is now realistic for 2024 and no longer at the end of 2023, underlined Yann Furic, senior manager, asset allocation and alternative strategies at Financial Professionals (FDP).
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As the central bank has indicated its intention to continue to raise its rates, the tightening of monetary policy should also continue, observed Randall Bartlett, senior director of the Canadian economy at Desjardins.
This will cause economic activity to decline even faster than we predicted in our recent forecasts, increasing the risks of a recession in 2023, he warned, a scenario the bank does not foresee. .
After GDP growth of around 4% in the second quarter, the Bank of Canada expects economic growth to slow to around 2% in the third quarter.
The Canadian economy is expected to grow by 3.5% in 2022, 1.75% in 2023 and 2.5% in 2024, according to the institution’s forecasts.