Another key rate hike in Canada
The Bank of Canada has raised key rate for the 10th time since last March
The Bank of Canada has raised its key interest rate again, which immediately led to higher borrowing costs. This is the tenth rate hike since the spring of 2022. The 25 basis point increase brings the Bank of Canada's key rate to 5%, the highest since March 2001. The previous increase broke the April record of the same year.
In the Monetary Policy Report, the Bank of Canada notes that the rate hike was necessary to slow the pace of economic recovery and lower core inflation. The quarterly rate of core inflation has remained above the Bank of Canada's expectations since September 2022, hovering in the 3.5-4% range. Since the country's central bank began raising rates last March, inflation has fallen from its peak of 8.1% last summer to 3.4% in May 2023.
While the Bank of Canada recognizes that falling energy prices, easing supply constraints and interest rate hikes are contributing to lower inflation, it forecasts that inflation will remain around 3% over the next year. The Bank notes that economic growth is not slowing as quickly as expected, driven by increased demand and stronger-than-predicted consumer spending in the first quarter of 2023.
The Central Bank's goal is to keep inflation at 2%. And currently the bank's analysts assume that inflation will return to this level by the middle of 2025. This is two quarters later than previously forecast.
“The next stage in the decline of inflation towards target is expected to take longer and is more uncertain. This is partly due to elevated services inflation, which can adjust sluggishly, and uncertainty about expected inflation,” reads the Bank of Canada's report.
Analysts also warn that "it is possible that inflation expectations will remain higher for longer” and “progress towards the 2 per cent target could stall, jeopardizing the return to price stability.”
Due to the key rate hike, the Bank of Canada expects Canadian real GDP growth to slow to 1.5% in the second quarter of 2023, and decline to around 1% in the second half of this year and the first half of next year. Economic growth is expected to accelerate in 2025, with GDP growth expected to reach 2.4%.
The report does not mention a pause in interest rate hikes, which means that the probability of another increase remains. The Central Bank will make the next decision on the key rate on September 6.
