The Bank of Canada (BOC) said its 50 basis point interest rate hike today is working to achieve a 2% inflation target and will calm the Canadian economy by restoring price stability.
The BOC also increased its target for the overnight rate to 3¾%, with the bank rate at 4% and the deposit rate at 3¾%. The bank said it is also continuing its policy of quantitative tightening. This is the sixth time in a row this year Canada’s central bank has raised rates.
In a statement, the BOC said its decision was influenced by global inflation, the strength of the US dollar, and continuing supply disruptions and elevated commodity prices, particularly for energy.
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“Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world. As economies slow and supply disruptions ease, global inflation is expected to come down,” the BOC wrote.
Over the last three months, Canada's annual inflation rate dropped from 8.1% to 6.9%, largely due to a decrease in the price of gasoline. However, the cost of groceries climbed 11.4% in September from a year ago, according to Statistics Canada.
Michael Hewson, chief market analyst at CMC Markets, said the Bank of Canada kicks off a week of several key central bank decisions later today, with the ECB tomorrow and the Bank of Japan on Friday.
“There is already increasing evidence that wages are starting to rise in response to this recent inflation surge. However, headline CPI does appear to be showing signs of slowing, with headline CPI falling to 7% in August, from the June peaks of 8.1%,” Hewson wrote in a report.
The BOC said the Canadian economy continues to operate in excess demand and that 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. Businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services,” according to the central bank.
The effects of recent policy rate increases are more evident in interest-sensitive areas of the economy, as housing activity has retreated sharply, and spending by households and businesses is softening, according to the central bank.
The BOC said it projects gross domestic product growth will slow from 3¼% this year to just under 1% next year and 2% in 2024.
“We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target,” the BOC wrote.