OTTAWA, June 7 (Portal) – The Bank of Canada hiked its overnight interest rate to a 22-year high of 4.75% on Wednesday and markets and analysts immediately forecast another hike next month to ease an overheated economy and curb stubbornly high inflation.
The central bank has been on hold since January to gauge the impact of previous rate hikes, after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50% – the fastest tightening cycle in the bank’s history.
Surprisingly strong consumer spending, a rebound in demand for services, a pick-up in real estate activity and a tight labor market show excess demand is more persistent than expected, the central bank said in a statement.
Noting a rise in inflation in April and the fact that three-month core inflation remained elevated, the Bank of Canada (BoC) said that “concerns have grown that CPI inflation will remain well above the 2% target could.”
Against this background, the Governing Council noted that “monetary policy was not restrictive enough to rebalance supply and demand and bring inflation back to the 2% target in a sustainable manner”.
The Canadian dollar was up 0.4% at 1.3350 against the greenback, or 74.91 US cents, after hitting a four-week high of 1.3322. Money markets see a 60% chance of another rate hike in July and have fully priced in further tightening by September.
“We expect another 25 basis points in July,” said Derek Holt, vice president of capital markets economics at Scotiabank. “It’s like a bag of chips, you open one and you just can’t have any.”
The last time the rate reached 4.75% was in April and May 2001.
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BoC Deputy Governor Paul Beaudry will deliver a speech and answer media questions on Thursday in British Columbia.
CRISIS VS. SOFT LANDING
The leader of Canada’s main opposition party, the Conservative Party, Pierre Poilievre, addressed his parliamentary group. He accused Liberal Prime Minister Justin Trudeau of driving inflation through deficit spending and leading the country into a “full-blown financial crisis”.
However, Canada’s Finance Minister Chrystia Freeland said that the economic recovery following the COVID-19 pandemic and the Russian invasion of Ukraine have caused prices to rise.
No country is “better positioned for a soft landing than Canada,” she told reporters. “We are nearing the end of this difficult period and are about to return to low, stable inflation and strong, steady growth.”
In April, annual inflation accelerated to 4.4% for the first time in 10 months. GDP rose 3.1% in the first quarter – versus the 2.3% forecast by the BoC – and economic growth is expected to come in at 0.2% in April.
“Canada’s economy has shown remarkable resilience going into 2023,” said Andrew Kelvin, chief strategist for Canada at TD Securities, who also expects another surge in July. “To lower demand, which is the bank’s aim to meet its 2% inflation target, we simply need more tightening.”
The BoC said it will continue to assess economic indicators to see if they are “consistent with meeting the inflation target”.
However, it refrained from the wording in the previous April policy statement that it “remains ready to raise interest rates further” to bring inflation to target levels, leaving the outcome of its possible next move more open-ended.
The BoC indicated that inflation would still fall to 3% this summer, but did not reiterate that it would slowly ease towards its 2% target by the end of next year, as it did in its last forecast in April .
Reporting by Steve Scherer and David Ljunggren; Additional reporting by Fergal Smith, Divya Rajagopal and Nivedita Balu in Toronto; Edited by Mark Porter
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