The Bank of Canada decided to raise interest rates substantially this time around with an increase of 100 basis points to 2.5 percent on July 13 in its ongoing fight to bring down alarming consumer price inflation. The increase marks the largest one -time increase in interest rates since 1998.
Based on the BoC statement, "The Governing Council has decided to take the route of raising interest rates higher."
Financial markets broadly expect an increase of 3/4 percentage points after the U.S. Federal Reserve. raised the target range by 3/4 percentage points on June 15th. The central bank also said that inflation was “higher and persistent” than projected in April. Based on past expectations, inflation "is likely to remain around 8 percent in the next few months."
Inflation hit a 39 -year high of 7.7 percent in May and has exceeded the central bank’s upper limit of 3 percent within its annual inflation target range since April 2021.
On that basis, the central bank expressed greater concern about rising inflation expectations based on its survey of businesses and consumers, indicating that the group expects inflation to remain higher for longer.
In its monetary policy (MPR) report, the central bank said that the results of the survey suggested greater uncertainty over the future direction of inflation. The average surge in inflation is driven by global factors such as high energy and food prices. At the same time, "domestic price pressures from excess demand are becoming more pronounced."
The BoC expects inflation to decline to about 3 percent by the end of 2023 before returning to the 2 percent target by the end of 2024. The Bank of Canada projects the Canadian economy to grow 3.5 percent in 2022 before slowing to 1.75 percent in 2023. The growth forecast for 2024 rises to 2.5 percent when the housing sector is stable and no longer hampers economic growth.
The BoC also commented on labor shortages, which are driving wage growth. It noted that businesses are raising prices due to higher input costs and wages. The labor market became tighter as the unemployment rate fell to a new record low of 4.9 percent in June and wages jumped 5.2 percent year -on -year from a 3.9 percent rise in May.
The Canadian currency strengthened against the US dollar with USD/CAD trading down 0.33% to the trading level of 1.2978.
