The Bank of Canada has today decided to increase its target overnight rate to 4.5%, with the Bank Rate at 4.75% and the deposit rate at 4.5%.
Global inflation remains high and still widespread. However, inflation has started in most countries, largely due to lower energy prices and improvements in global supply chains. In the United States and Europe, the economy is still slow but has proven to be more resilient than expected at the time of the Monetary Policy Report (MPR) last October.
China's sudden lifting of strict Covid-19 controls has also prompted an upward revision to growth forecasts for China and raised the risk of rising commodity prices. Russia's war on Ukraine remains a significant source of uncertainty. Financial conditions remain tight but have eased since October, and the Canadian dollar is relatively stable against the US dollar.
The bank estimates the global economy will grow by about 3.5% in 2022, and will slow to about 2% in 2023 and 2.5% in 2024. This projection is slightly higher than the one issued last October.
In Canada, economic growth has recently been stronger than expected and the economy remains in excess demand. The labor market remains strong with the unemployment rate near historic lows and businesses reporting continued difficulty finding workers.
However, there is growing evidence that monetary policy has constrained and slowed activity, particularly household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has slowed significantly.
As the effects of rising interest rates continue to weigh on the economy, spending on consumer services and business investment is expected to slow. Meanwhile, weaker foreign demand is likely to affect exports. This overall dampening of activity will allow supply to catch up with demand.
The bank estimates Canada's economy will grow by 3.6% in 2022, slightly stronger than projected in October. The bank also expects GDP growth of about 1% in 2023 and about 2% in 2024, little changed from its October outlook.
Inflation has declined from 8.1% in June to 6.3% in December, reflecting lower petrol prices. Despite this progress, Canadians are still feeling the pinch of high inflation in their household spending, with prices continuing to rise for food and shelter.
