Canada’s central bank is aggressively hiking rates but also expecting more inflation. The Bank of Canada (BoC) rate decision got all of the attention yesterday, but that was expected. It’s the BoC forecast that was a surprise, as they hiked their inflation expectations. The consumer price index (CPI) annual growth numbers received an uptick for 2022 and 2023. Rates will need to rise so sharply to cool inflation now, they trimmed next year’s GDP growth.
Bank of Canada Increases Inflation Outlook For 2022
The BoC inflation forecast for this year has climbed sharply this week. They expect the year to average 5.3% growth for 2022, up from 4.2% in January. The previous report (and the one prior) also had raised expectations, so don’t get too excited about the peak yet.
The BoC has previously mentioned it takes between 18 and 24 months for rate hikes to be fully realized. March’s hike won’t be completely reflected in prices until next year. Though the increase does have some immediate effect, especially in terms of psychology.
Canada’s Inflation Forecast Also Increased For 2023
Don’t expect the mess to be fixed by next year because inflation will still be elevated. The BOC has forecast annual CPI to average 2.8% in 2023. This is an upward revision from 2.3% in the previous forecast.
Generally one point above or below the 2 point target is considered acceptable. This would still be 40% more inflation than desired, but significantly less than today. Forecasts that are further out tend to be subject to more revisions than near-term estimates. Since the estimate for 2023’s annual growth is so close to the upper range of tolerance, a small upward revision can push it outside.
Next year’s elevated inflation will require higher interest rates and slower growth. GDP forecasts from the central bank were revised lower to reflect this, falling to 2.2% annual growth in 2023. This is down from the 2.8% forecast previously. The new revision isn’t particularly impressive for a country that’s also forecast to see population rise 1% over the same period.