Bank of Canada Raises Rates to All-time High and More Increases Coming
Jun 08, 2023
The Bank of Canada increased its overnight rate on Wednesday to an all-time high of 4.75 percent, and markets and economists quickly predicted a further rise next month to cool the overheating economy while persistently rising inflation.
After increasing borrowing prices eight times to 4.50% since March of 2022 - the quickest tightening cycle during the bank's history - the central bank was on hold since January to evaluate the effects of earlier hikes.
The central bank stated in a statement that unexpectedly high consumer spending, a pick-up in service demand, a rise in housing activity, and tight employment conditions demonstrate that excess demand has been more enduring than anticipated.
The Bank of Canada noted an increase in inflation this April and that three-month indicators of main inflation stayed high, noting that serious concerns have stepped up that CPI inflation might become stuck materially beyond its 2% target.
Given this context, the governing council came to the conclusion that monetary policy wasn't sufficiently strict to bring demand and supply back to balance and bring down inflation stably to its 2% target.
Canadian dollar was up 0.4% against the dollar, or 74.91 US cents, at 1.3350 after reaching its highest level in a span of four weeks at 1.3322. The likelihood of a subsequent rate increase in July is 60%, and by September, the money markets will have fully factored in additional tightening.
Vice president of capital markets economics at Scotiabank, Derek Holt stated that they expect an additional 25 basis points coming this July. It's like you open a package of chips, you simply can't eat one.
The time the rate last reached 4.75% is April and May of 2001.
To his legislative caucus, Conservative Party of Canada leader Pierre Poilievre delivered a speech. He charged that Justin Trudeau, Liberal Prime Minister, had increased inflation through deficit spending and led the nation toward a full-scale financial crisis.
However, Chrystia Freeland, Canada's Finance Minister said economic recovery after the COVID-19 epidemic have fueled price hikes.
She told reporters that Canada is the best-positioned nation for a gentle landing and this challenging period will soon come to an end, and robust, steady growth and low, stable inflation will return.
For the first time in nearly 10 months, annual inflation increased to 4.4% in April. GDP increased by 3.1% in the first quarter, exceeding the BoC's prediction of 2.3%, and in April, it is expected to grow by 0.2%.
According to Andrew Kelvin, who is chief Canada strategist at TD Securities, and also anticipates another increase in July, the Canadian economy has demonstrated exceptional durability through 2023 and they just need to tighten monetary policy further in order to reduce demand, which is what the bank needs to do to meet its 2% inflation target.
The Bank of Canada stated that it would continue to evaluate economic indicators in the future to determine if they are adequate for reaching the inflation target.
However, it removed language from the last policy statement from April stating that it remains ready to raise the rate further to bring inflation to the target level, leaving its next potential move more ambiguous.
The bank still expected inflation to decline to 3% this summer, yet it did not restate that it would gradually decrease to its 2% goal by the end of the following year, as it did when it presented its previous projections in April.
