The Bank of Canada is warning inflation will stay higher for longer than it previously forecast and signalled that an interest rate hike may be coming sooner than expected.
The central bank said Wednesday it now forecasts that annual inflation rates will continue their upward swing through the rest of year, averaging 4.75 per cent, and be 3.4 per cent next year, up from its previous forecast of 2.4 per cent, before coming back to its two per cent target by 2023.
Still, the bank said the economy has rebounded far enough for it to end its government bond-purchasing program aimed at encouraging lower interest rates, but the recovery is far from complete, which why it kept its key policy rate on hold at 0.25 per cent. In its monetary policy report, the Bank of Canada cut its expectations for growth in the Canadian economy this year to 5.1 per cent from its previous forecast of 6.0 per cent. Growth next year is now expected to clock in at 4.3 per cent, down from an earlier forecast for 4.6 per cent.
Similarly, the outlook warns that temporary factors driving inflation could become even more persistent and drive wage growth that itself fuels an inflationary spiral.
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