The Bank of Canada today raised its target for the overnight rate to 3¼%, with the bank rate at 3½% and the deposit rate at 3¼%. The Bank also continues with its quantitative tightening policy.
The global and Canadian economies are evolving broadly in line with the Bank’s July projection. The effects of the COVID-19 outbreaks, ongoing supply disruptions and the war in Ukraine continue to dampen growth and drive up prices.
Global inflation remains high and measures of core inflation are rising in most countries. In response, central banks around the world continue to tighten monetary policy. Economic activity in the United States has moderated, although the US labor market remains tight. China faces constant challenges from the COVID shutdowns. Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen.
In Canada, CPI inflation eased in July to 7.6% from 8.1% due to lower gasoline prices. However, inflation excluding gasoline rose and the data point to increased price pressures, particularly in services. The Bank’s core measures of inflation continued to rise, rising from 5% to 5.5% in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk of high inflation becoming entrenched.
The Canadian economy continues to operate with excess demand and labor markets remain tight. Canada’s GDP grew 3.3% in the second quarter. While this was slightly weaker than the Bank had forecast, indicators of domestic demand were very strong: consumption grew by around 9½% and business investment rose by around 12%. With mortgage rates higher, the housing market is retreating as expected, after unsustainable growth during the pandemic. The Bank continues to expect the economy to moderate in the second half of this year as global demand weakens and tighter monetary policy here in Canada begins to align demand with supply.
Taking into account the prospects for inflation, the Governing Council still considers that the policy interest rate will have to increase further. Quantitative tightening is complementing policy rate hikes. As the effects of tighter monetary policy work through the economy, we will assess how much higher interest rates are needed to bring inflation back to target. The Governing Council remains resolute in its commitment to price stability and will continue to take the necessary measures to achieve the 2% inflation target.
Informative note
The next expected date to announce the overnight rate target is 26 October 2022. The Bank will publish its next comprehensive forecast for the economy and inflation at the same time, including risks to the projection, in the MPR