Canada’s central bank reiterated its commitment to reduce high inflation. The Bank of Canada (BoC) raised the rate to one day and continues with a quantitative easing (QT). It was not a big surprise as it was highly anticipated by the market. What is surprising is that the BoC once again raised its inflation forecast. This may indicate that they are even further behind in rate hikes than previously thought.
Bank of Canada raises interest rates by 50 basis points (BPS)
The BoC today offered its long-awaited “super” climb: slang for a 0.5-point climb, twice the usual pace. The overnight rate now stands at 1.5 points, about 6 times the all-time low reached as recently as earlier this year. Despite all the complaints, Canadian interest rates are still below the 1.75% that began this decade.
High inflation is driving the need for higher rates, repeated by the central bank. They warned that although rates are rising aggressively, it will take time to cool inflation. Meanwhile, the momentum for inflation is expected to continue, rising further.
“[Consumer Price Index] CPI inflation reached 6.8% in April, well above the Bank’s forecast, and is likely to rise further in the short term before it begins to ease, “the governor said. of BoC Macklem in a prepared speech.
There could be much higher rates on cards, with a rising neutral policy rate. “The risk of high inflation tightening has increased. The Bank will use its monetary policy tools to turn inflation back on target and keep inflation expectations firmly anchored,” the governor said.
The Bank of Canada raises its inflation forecast
Higher inflation is not only a short-term problem, but forecasts are also rising. The CPI is expected to show annual growth of 5.3% in 2022, up from 4.2% in the previous forecast. Next year they expect growth of 2.8%, 0.5 points more than the previous forecast. This is within the tolerable inflation range, but the upper limit of 3.0% is less than a revision.
“With the economy in excess of demand, and inflation persisting well above target and expected to rise in the short term, the Governing Council continues to judge that interest rates will need to rise further.” , explains the central bank in the Monetary Policy Report (MPR) that accompanies today’s announcement.
“The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is ready to act more strongly if necessary to meet its commitment to achieve the 2% inflation target, “he says. the BoC report.
Rising rates are expected to dampen what the BoC called “excess demand,” but it could take a while. At the same time, downward revisions are as likely as upward revisions if inflation cools.