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.