The Bank of Canada decided to abandon its conditional pause on interest rates by raising its target for the overnight lending rate by 25 basis points to 4.75% on Wednesday, June 7, while at the same time continuing its policy of quantitative tightening.
The overnight rate now sits at its highest level since 2001.
The Bank indicated that while global consumer price inflation has been coming down due to lower energy prices compared to last year, underlying inflation trends remain stubbornly high. They also noted while economic growth worldwide has softened due to higher interest rates, other global central banks have signalled they may need to further tighten monetary policy to restore price stability.
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According to the Bank, excess demand in the Canadian economy looks to be more persistent than anticipated. The Canadian economy grew stronger than expected in the first quarter of 2023, with demand for consumer goods and services continuing to increase. Additionally, spending on interest-sensitive goods and housing market activity have picked up. The labour market remains tight with higher immigration and participation rates expanding the supply of workers, with new workers getting quickly hired, reflecting continued strong demand for labour.
The Bank also noted consumer price index (CPI) inflation ticked up in April to 4.4%, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected. The Bank continues to expect CPI inflation to ease to around 3% in the summer but is concerned about getting materially stuck above the 2% target.
Looking ahead, the Bank noted they’ll continue to assess the dynamics of core inflation and the outlook for CPI inflation by “evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target.”
The Bank of Canada’s next scheduled interest rate announcement will be on July 12, 2023, at which time it will publish its next Monetary Policy Report.
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