Bank of Canada Hikes Interest Rates And Its Inflation Forecast

Canada’s central bank reiterated its commitment to lower elevated inflation. The Bank of Canada (BoC) hiked the overnight rate and is going ahead with quantitative tightening (QT). It wasn’t much of a surprise, as it was widely expected by the market. What is surprising is the BoC raised its inflation forecast once again. This may indicate they’re even further behind on rate hikes than previously believed. 

Bank of Canada Raises Interest Rates By 50 Basis Points (BPS)

The BoC delivered its widely-expected “super” hike today — slang for a 0.5 point hike, double the usual pace. The overnight rate is now at 1.5 points, about 6x the historic low reached as recently as the start of this year. Despite all of the complaints, Canada’s interest rates are still below the 1.75% it started this decade with. 

Elevated inflation is driving the need for higher rates, repeated by the central bank. They warned despite rates rising aggressively, it’ll take time to cool inflation. In the meantime, inflation momentum is expected to continue, rising even higher.

“[Consumer Price Index] CPI inflation reached 6.8% for the month of April – well above the Bank’s forecast – and will likely move even higher in the near term before beginning to ease,” said BoC Governor Macklem in a prepared speech. 

Much higher rates might be in the cards, with a rising neutral policy rate needed. “The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well anchored,” said the Governor.  

Bank of Canada Raises Its Inflation Forecast

Higher inflation isn’t just a near-term issue but forecasts are climbing too. CPI is forecast to show annual growth of 5.3% in 2022, up from 4.2% in the previous forecast. Next year they anticipate 2.8% growth, up 0.5 points from the previous forecast. That’s within the range of tolerable inflation, but the 3.0% upper bound is less than one revision away. 

“With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further,” explains the central bank in the Monetary Policy Report (MPR) that accompanies today’s announcement.

“The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” reads the BoC report.  

Rising rates are expected to dampen what the BoC called “excess demand,” but it might take a while. At the same time, downward revisions are just as likely as upward ones have been, if inflation cools.

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  • Ron Bruce 8 months ago

    Rising rates are expected to dampen what the BoC called “excess demand,” but it might take a while. At the same time, downward revisions are just as likely as upward ones have been if inflation cools.

    The minimum wage in BC will increase to $15.65 on June 1st for everyone. But the minimum wage is still far from a living wage — at least in Metro Vancouver. The Canadian Centre for Policy Alternatives pegged the region’s living wage at $20.52 for 2021. Excess demand or even affordable housing has never been on these individuals’ radar. And inflation will keep housing out of reach for the majority of residents.

    The living wage is calculated as the hourly amount each of TWO WORKING PARENTS with two young children must earn to meet basic expenses — two earners making a living wage are needed to make a family comfortably function, the CCPA explains.

  • Grim Reaper 8 months ago

    Too little too late. Rapidly increased and further increasing inflation is not being effectively counteracted by inadequate and slowly rising interest rates. Inflation is now locked into the economy and will continue increasing which is robbing wage earners, everyone on fixed income including those on pensions inadequately indexed to inflation, savers.

  • Scott 8 months ago

    Is this the economic equivalent of shooting yourself in the foot?
    Oh well only one thing left to do: Time to dust of Pierre Elliot Trudeau’s “wage and price controls”…

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