By Ketki Saxena
Investing.com -- The Bank of Canada raised its Benchmark Rate by 50 bps to 3.75%, less than the 75 bps move than had been expected by economists.
The Bank is also continuing its policy of quantitative tightening, and announced the policy rate will need to rise further “given elevated inflation and inflation expectations, as well as ongoing demand pressures in the economy”.
The Bank cited still high and still broad-based inflation, an overheated domestic economy, and tight labour markets as the reasons for its move to raise rates.
In the press release accompanying the announcement, the Bank noted that “The economy continues to operate in excess demand and labour markets remain tight. The demand for goods and services is still running ahead of the economy’s ability to supply them, putting upward pressure on domestic inflation.”
In terms of inflation, while acknowledging the decline in CPI from an 8.1% peak to its latest 6.9% reading, the Bank notes that the decrease was primarily due to a fall in gasoline price, but price pressures remain broad based, with over 2/3s of CPI components having increased over 5% in the past year.
The Bank further notes that, crucially, measures of “core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.”
The risk of inflation - and expectations for inflation - becoming entrenched is a key challenge the Canadian central bank must contend with, as it grows increasingly concerned of triggering a wage price spiral.
CPI is expected to be back to the 2% target by only the end of 2024, and is expected to slow to 3% by the end of next year.
The Bank of Canada also appeared to confirm the downturn that many economists have been calling for: a dramatic downturn in the Canadian economy, which appears to further narrow the path towards a possible soft landing.
The report notes that “economic growth is expected to stall through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy.”
GDP growth is projected to slow from 3.25% this year to just under 1% next year and 2% in 2024