OTTAWA –
The Bank of Canada raised its overnight interest rate by 100 basis points to 2.5 percent after higher-than-expected inflation. It was the biggest rate hike by the central bank since August 1998.
The central bank attributed the war in Ukraine and ongoing supply chain issues as the main drivers, but also highlighted excess demand in the domestic Canadian economy as a growing factor.
In May, the consumer price index (CPI) reached 7.7%, the highest annual increase in almost 40 years. The bank says more than 50% of price categories rose by 5%.
The bank predicts that inflation will continue and peak at around 8% over the next few months. Inflation is expected to ease from late 2022, reach 3 percent by late 2023 and return to target by late 2024.
The central bank also cut its forecast for economic growth, with gross domestic product (GDP) slowing to 3.5% in 2022 and 1.75% next year.
A contributing factor to this decline is commodity prices, such as the price of oil, which are expected to continue to decline. The central bank expects bottlenecks in the global supply chain to begin to ease.
Higher interest rates are also expected to help reduce inflation on the domestic front, with prices in the Canadian housing market set to decline in the second half of 2022 and into 2023 as “as borrowing rates rise and the resulting since the pandemic, the increase in demand is decreasing.”
Interest rate hikes are expected to continue until the end of this year to cushion Canada’s overheated economy.
“Given the high rate of inflation and barring economic contingencies, it is likely that the key interest rate will continue to rise above 3 percent before the end of the year,” said Kevin Page, president and CEO of the Institute for Fiscal Studies and democracy at the University of Ottawa.
The next interest rate announcement is expected on September 7, 2022.
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