OTTAWA-
The Bank of Canada has raised its key one-day interest rate by 50 basis points to 1.5% and will also continue its quantitative easing. The rate hike comes when the Bank believes inflation is likely to rise in the short term before it begins to ease.
The bank says it will continue to raise interest rates to fight inflation and that they are “ready to act more strongly if necessary to meet its commitment to reach the 2% inflation target”.
With 70% of the categories of the consumer price index, a key measure of inflation, above 3%, the Bank believes that “it has increased the risk of high inflation getting entangled”. In April, the CPI reached 6.8%, the highest level in 31 years.
The Bank notes that high inflation is also approaching as the world economy begins to slow down due to the war in Ukraine, COVID blockades in China, and continued supply disruptions. The war in Ukraine, in particular, has put pressure on energy and agricultural raw materials, which the Bank believes will specifically affect the European economy in a negative way.
Despite the bleak global outlook, the Bank says the Canadian economy is “clearly operating in excess demand” right now. They point to GDP growth of 3.1% in the first quarter of 2022, widespread labor shortages and wage growth as evidence of strong market activity. The Bank also expects growth in the second quarter of 2022 to be “solid” as well.
One aspect of the Canadian economy that is beginning to show signs of cooling is the housing market, which the Bank believes is moderating from “exceptionally high levels”.
The bank also plans to continue its quantitative easing policy, selling Canadian government bonds it bought during the pandemic. The bank’s balance sheet peaked in December 2021 at $ 435 billion in book bonds, but fell to $ 417 billion by the end of April 2022. Prior to the pandemic, the bank had bonds worth $ 80 billion in March 2020.
Despite plans to reduce the number of bonds it holds, the Bank considers interest rate hikes to be considered by the Bank as the “main monetary policy tool, with quantitative easing acting as a complementary tool”.
The next rate announcement is scheduled for July 13th.
Bank of Canada raises policy rate by 50 basis points and continues quantitative easing #economy #cdnecon https://t.co/TxKc6CvslK
– Bank of Canada (@bankofcanada) June 1, 2022