The Bank of Canada today raised its overnight interest rate target to 1½%, with a bank interest rate of 1¾% and a deposit rate of 1½%. The Bank also continues its quantitative tightening policy (QT).
Global and Canadian inflation continues to rise, largely driven by higher energy and food prices. In Canada, CPI inflation reached 6.8% in April – well above the bank’s forecast – and is likely to move even higher in the short term before declining. As comprehensive pressures on commodity prices affect consumer prices, inflation continues to widen, with key measures of inflation ranging from 3.2% to 5.1%. Almost 70% of CPI categories already show inflation above 3%. The risk of perpetuating increased inflation has increased. The bank will use its monetary policy instruments to bring inflation back to target and keep inflation expectations well anchored.
Rising global inflation is happening as the global economy slows. The Russian invasion of Ukraine, China’s blockade of COVID, and ongoing supply disruptions all weigh on activity and increase inflation. The war has increased insecurity and put additional pressure on rising energy and agricultural prices. This worsens the prospects, especially in Europe. In the United States, private domestic demand remains stable despite the contraction of the economy in the first quarter of 2022. The strength of the US labor market continues, with wage pressures intensifying. Global financial conditions have tightened and markets have been volatile.
Canadian economic activity is strong and the economy is clearly in excessive demand. Data on national accounts for the first quarter of 2022 show GDP growth of 3.1 percent, according to the Bank’s forecast for the April Monetary Policy Report (MPR). Job vacancies are rising, companies are experiencing widespread labor shortages, and wage growth is intensifying and expanding across sectors. Housing market activity is slowing from extremely high levels. As consumer spending in Canada remains stable and exports are expected to strengthen, growth is expected to be stable in the second quarter.
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 political interest rate remains the main instrument of the Bank’s monetary policy, with the quantitative tightening acting as an additional instrument. The pace of further interest rate increases will be guided by the Bank’s ongoing assessment of the economy and inflation, and the Governing Council is ready to act more vigorously if necessary to meet its commitment to meet the inflation target of 2 %.
Information note
The next scheduled date for announcing the overnight interest rate is July 13, 2022. The Bank will publish its next full outlook for the economy and inflation, including forecast risks, in the MPR at the same time.
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