The Central Bank of Canada has reaffirmed its commitment to lower rising inflation. The Bank of Canada (BoC) raised its overnight interest rate and continued to tighten quantitatively (QT). This was not a big surprise, as it was widely expected by the market. Surprisingly, the BoC raised its inflation forecast again. This may mean that they are even further behind with rising interest rates than previously thought.
Bank of Canada raises interest rates by 50 basis points (BPS)
BoC unveiled its much-anticipated “super” increase today – slang for a 0.5 point increase, twice the usual pace. The overnight rate is now at 1.5 points, about 6 times the historic low reached earlier this year. Despite all the complaints, Canada’s interest rates are still below the 1.75% that began the decade.
Rising inflation necessitates higher interest rates, repeated by the central bank. They warned that despite the aggressive rise in interest rates, it will take time to cool inflation. Meanwhile, the inflation impulse is expected to continue, rising even more.
“[Consumer Price Index] CPI inflation reached 6.8% in April – well above the bank’s forecast – and is likely to rise even higher in the short term before declining, “said BoC CEO Macklem in a prepared speech.
There may be much higher interest rates, and a growing neutral rate is needed. “The risk of rising inflation has increased. “The bank will use its monetary policy instruments to bring inflation back to target and keep inflation expectations well anchored,” he said.
Bank of Canada raises its inflation forecast
Higher inflation is not only a short-term problem, but forecasts are rising. The CPI is projected to show an annual growth rate of 5.3% in 2022, compared to 4.2% in the previous forecast. Next year, they expect growth of 2.8%, which is 0.5 points more than the previous forecast. This is within the allowable inflation rate, but the upper limit of 3.0% is less than one revision.
“As the economy is in excessive demand and inflation continues to exceed targets and is expected to rise in the short term, the Governing Council continues to consider that interest rates will need to rise further,” the central bank explained in the Monetary Policy Report ( MPR), which accompanies today’s announcement.
“The pace of further interest rate increases will be driven by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is ready to step up, if necessary, to meet its commitment to meet the inflation target of 2%, “the BoC report said.
Rising interest rates are expected to reduce what the BoC called “excessive demand”, but it may take some time. At the same time, downward revisions are just as likely as upward revisions if inflation cools.
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