Canada Markets open in 4 hrs 55 mins

Bank of Canada raises interest rate: Read the official statement

CANADA-ECONOMY-FINANCE
CANADA-ECONOMY-FINANCE

Here’s the official statement from the Bank of Canada’s interest rate decision on Wednesday, July 13, 2022:

The Bank of Canada today increased its target for the overnight rate to 2.5 per cent, with the Bank Rate at 2.75 and the deposit rate at 2.5 per cent. The Bank is also continuing its policy of quantitative tightening (QT).

Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around eight per cent in the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than five per cent. With this broadening of price pressures, the Bank’s core measures of inflation have moved up to between 3.9 per cent and 5.4 per cent. Also, surveys indicate more consumers and businesses are expecting inflation to be higher for longer, raising the risk that elevated inflation becomes entrenched in price- and wage-setting. If that occurs, the economic cost of restoring price stability will be higher.

Global inflation is higher, reflecting the impact of the Russian invasion of Ukraine, ongoing supply constraints, and strong demand. Many central banks are tightening monetary policy to combat inflation, and the resulting tighter financial conditions are moderating economic growth. In the United States, high inflation and rising interest rates are contributing to a slowdown in domestic demand. China’s economy is being held back by waves of restrictive measures to contain COVID-19 outbreaks. Oil prices remain high and volatile. The Bank now expects global economic growth to slow to about 3.5 per cent this year and two per cent in 2023 before strengthening to three per cent in 2024.

Further excess demand has built up in the Canadian economy. Labour markets are tight with a record low unemployment rate, widespread labour shortages, and increasing wage pressures. With strong demand, businesses are passing on higher input and labour costs by raising prices. Consumption is robust, led by a rebound in spending on hard-to-distance services. Business investment is solid and exports are being boosted by elevated commodity prices. The Bank estimates that GDP grew by about four per cent in the second quarter. Growth is expected to slow to about two per cent in the third quarter as consumption growth moderates and housing market activity pulls back following unsustainable strength during the pandemic.

The Bank expects Canada’s economy to grow by 3.5 per cent in 2022, 1.75 per cent in 2023, and 2.5 per cent in 2024. Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy. This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures. Global energy prices are also projected to decline. The July outlook has inflation starting to come back down later this year, easing to about three per cent by the end of next year and returning to the two per cent target by the end of 2024.

With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today. The Governing Council continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation. Quantitative tightening continues and is complementing increases in the policy interest rate. The Governing Council is resolute in its commitment to price stability and will continue to take action as required to achieve the two per cent inflation target.

Information note

The next scheduled date for announcing the overnight rate target is Sept. 7, 2022. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on Oct. 26, 2022.