Latest Bank of Canada Rate Hike to Be Followed By a Pause at 4.50%

January 25, 2023

When rate tightening by the Bank of Canada began in March 2022, the benchmark had been languishing at 0.25% for the previous two years since a trio of 50-basis point cuts in March 2020 shortly after the onset of the Covid pandemic. Today’s eighth hike, like that first one, was 25 basis points in size. In between, there was a 100-basis point increase last July and a 75-bp jump in September, plus four other 50-bp hikes. Altogether, the rate has risen by 425 basis points (an 18-fold move) in the space of ten months. According to today’s policy statement, monetary policy will now enter a trust-but-verify stage. Balance sheet reduction will continue by not reinvesting all maturing bonds acquired via the previous program of quantitative easing. But, in addition,

If economic developments evolve broadly in line with the MPR outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases. Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2% target, and remains resolute in its commitment to restoring price stability for Canadians.

The quarterly Monetary Policy Report that was released today projects a sharp deceleration in consumer price inflation continuing the slowdown from 8.1% in mid-2022 to 6.3% last month and extending to slightly over 3% in the middle of this year, 2.6% by the final quarter of 2023 and back to the 2.0% target by 4q 2024. With household consumption and construction spending already exhibiting a pronounced loss of momentum and export demand set to falter amid world growth this year of less than 2.0%, officials project that Canadian real GDP will expand just 1.0% this year, down from 3.6% in 2022, and then rise just 1.8% in 2024. Stickier services sector price inflation is identified as the main upside risk to Canadian inflation forecast, and the possibility of a “severe global slowdown” looms as the main downside risk to inflation.

Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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