The Bank of Canada raised its key interest rate by 50 basis points on Wednesday to 3.75%. Read the central bank\u0027s official statement here.
The effects of recent policy rate increases by the bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening. Also, the slowdown in international demand is beginning to weigh on exports. Economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy.
In the last three months, CPI inflation has declined from 8.1 per cent to 6.9 per cent, primarily due to a fall in gasoline prices. However, price pressures remain broadly based, with two-thirds of CPI components increasing more than five per cent over the past year. The bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing.
The bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about three per cent by the end of 2023, and then return to the two per cent target by the end of 2024.
Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the Governing Council expects that the policy interest rate will need to rise further. Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding. Quantitative tightening is complementing increases in the policy rate.
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