The Bank of Canada (BoC) today increased its target for the overnight rate to 3.75 per cent, with the Bank Rate at 4 per cent and the deposit rate at 3.75 per cent.The central bank is also continuing its policy of quantitative tightening.
"Inflation around the world remains high and broadly based," the BoC said in a statement. This reflects the strength of the global recovery from the pandemic, a series of global supply disruptions, and elevated commodity prices, particularly for energy, which have been pushed up by Russia’s attack on Ukraine. The strength of the US dollar is adding to inflationary pressures in many countries. 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.
Overall, the central bank projects that global growth will slow from 3 per cent in 2022 to about 1.5 per cent in 2023, and then pick back up to roughly 2.5 per cent in 2024. This is a slower pace of growth than was projected in the BoC’s July Monetary Policy Report (MPR).
In Canada, the economy continues to operate in excess demand and labour markets remain tight, the BoC said. 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.
The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening. Also, the slowdown in international demand is beginning to weigh on exports. 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. The Bank projects GDP growth will slow from 3.25 per cent this year to just under 1% next year and 2% in 2024.
In the last three months, CPI inflation has declined from 8.1% to 6.9%, primarily due to a fall in gasoline prices. However, price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year. The Bank’s preferred 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 Bank expects CPI inflation to ease as higher interest rates help rebalance demand and supply, price pressures from global supply disruptions fade, and the past effects of higher commodity prices dissipate. CPI inflation is projected to move down to about 3% by the end of 2023, and then return to the 2% target by the end of 2024.
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. "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 statement said.
The next scheduled date for announcing the overnight rate target is December 7.