Bank of Canada Beats Expectations with a 100-Basis Point Rate Hike that May Foreshadow the Fed’s Next Move
July 13, 2022
The fourth Canadian central bank rate hike of 2022 followed earlier increases of 25 basis points in March and 50-basis point moves in April and June. The new 2.5% rate level is 75 basis points above the pre-pandemic level of 1.75%. All three 50 basis point cuts in 2020 had been implemented near the start of the pandemic in March. Today’s policy review coincided with an update of the central bank’s forecasts and the quarterly Monetary Policy Report.
Canadian monetary authorities are raising interest rates for the same reason as central bankers in a load of other countries: inflation is way above target at multi-decade highs, continuing to accelerate and spread to other sectors of the economy, and being now accompanied by a tight labor market and signs of climbing inflation expectations. Canada’s CPI inflation reached 7.7% in May, a 472-month high and is not expected to return to its 2% target until late 2024. More interest rate hikes will follow, according to the BOC statement, and quantitative tightening, which since late April entails not replacing maturing bonds acquired in the previous period of quantitative stimulus, will continue as well.
Updated forecasts project Canadian GDP growth slowing from 3.5% this year to 1.75% in 2023 but reviving to 2.5% in 2024. Officials also assume faster growth in 2024 than 2023 in Euroland, China, and Japan but conspicuously not in the United States, where they see GDP slowing from 2.8% this year to 1.9% next year and 1.5% in 2024. Canadian CPI inflation is projected to average 7.2% in 2022, 4.6% in 2023 and 2.3% in 2024.
Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Canada
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