Bank of Canada Overnight Target Interest Rate Lifted from 4.75% to 5.0%
July 12, 2023
Acting at every scheduled policy review from March 2022 until January 2023, the Bank of Canada governing council had raised its interest rate target from 0.25% to 4.50% and also began a program of balance sheet reduction that supplemented monetary tightening. The rate was not changed at the following two reviews, but a cycle of increase resumed last month and went even further at the latest meeting. The latest two 25-basis point increases to 5.0% are justified by an upward revision in the projected down-path of inflation that now envisages the 2.0% target restored not before mid-2025, rather than at end-2024 as assumed previously. The revision is attributed to more persistent excess demand, higher-than-expected house prices and higher-than-expected prices for tradable goods. Tweaked forward guidance is ambiguous. According to Governor Macklem
We are prepared to increase our policy rate further. But we don’t want to do more than we have to. We need to see demand growth slow, wage pressures moderate and corporate pricing behavior normalize. We will also need to see near-term inflation expectations and measures of core inflation come down further. With the downward momentum in inflation waning and our forecast suggesting inflation will be around 3% for the next year, we are concerned that the progress to price stability could stall, and inflation could even rise again if there are upside surprises.
For more depth behind the rationale of today’s rate increase, please visit the new quarterly Monetary Policy Report that was also published today. The next policy announcement is scheduled for September 6, 2023.
Copyright 2023, Larry Greenberg. All rights reserved. No secondary distribution without express permission.
Tags: Bank of Canada
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