The Bank of Canada hiked its key interest rate by half of a percentage point Wednesday and said rates will need to rise further to clamp down on decades-high inflation.
Since March, the central bank has raised its key interest rate six consecutive times, bringing it from 0.25 per cent to 3.75 per cent in one of the fastest monetary policy tightening cycles in its history.
Economists were split on whether the Bank of Canada would go with half or three-quarters of a percentage point heading into Wednesday's announcement.
Tu Nguyen, an economist with RSM Canada, says the announcement is “surprising” and “risky” given the U.S. Federal Reserve is expected to raise rates by three-quarters of a percentage point next week.
“That could be risky in the sense that it could weaken the Canadian dollar even more than it is right now,” Nguyen said. “That could fuel inflation even further, because it makes anything that is imported from the U.S. to Canada more expensive.”
In a news release, the bank said it expects interest rates will have to rise even further to clamp down on stubbornly hot inflation.
“Given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy, the governing council expects that the policy interest rate will need to rise further,” the Bank of Canada said, noting that future rate hikes would be determined based on how it sees the economy responding to higher interest rates.
In its latest monetary policy report, the bank notes that although inflation has eased in recent months, prices for food and services continue to rise rapidly.
Canada's annual inflation rate dropped slightly in September to 6.9 per cent but the cost of groceries continues to climb. According to Statistics Canada, the cost of groceries has been rising at the fastest pace since 1981, with prices up 11.4 per cent in September compared with a year ago.
The Bank of Canada says it expects inflation to slow to three per cent by the end of 2023 before getting back to its two per cent target by the end of 2024.
The Bank of Canada said the Canadian economy continues to operate with significant excess demand while businesses face widespread labour shortages.
Higher interest rates are starting to help rebalance supply and demand in the economy as higher borrowing costs slow spending, the bank said.
As fears of an impending recession grow, the central bank has revised down its forecast for growth both domestically and globally.
In Canada, the central bank said it expects economic growth to stall toward the end of the year and into the beginning of 2023, with growth somewhere between zero per cent and 0.5 per cent.
“This suggests that a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth,” the bank said.
Its longer run forecast suggest the Canadian economy will grow by just under one per cent in 2023, then by two per cent in 2024.
The bank said that while it previously considered the negative effects of supply chain disruptions and the labour market mismatch to be temporary, it now assumes them to be permanent. That change will weigh on economic growth, though higher immigration will partially offset their effects, the bank said.
Global growth is expected to decline from 3.25 per cent in 2022 to about 1.5 per cent in 2023, marking the slowest rate of global growth since 1982, excluding the COVID-19 pandemic and the 2008-09 global financial crisis. It’s then expected to rebound to about 2.5 per cent in 2024.
This report by The Canadian Press was first published Oct. 26, 2022.
The Canadian Press
