The Bank of Canada today increased its overnight rate target to 4½%, with the bank rate at 4¾% and the deposit rate at 4½%. The bank also continues its policy of quantitative easing.
Global inflation remains high and wide-ranging. Inflation is easing in many countries, largely reflecting lower energy prices as well as improvements in global supply chains. In the United States and Europe, economies are slowing but proving more resilient than expected in the Bank’s October Monetary Policy Report (MPR). China’s sudden lifting of COVID-19 restrictions has prompted an upward revision to China’s growth forecast and poses a risk to commodity prices. Russia’s war against Ukraine remains a significant source of uncertainty. Financial conditions remain tight but have eased since October, and the Canadian dollar is relatively stable against the US dollar.
The bank estimates that the global economy grew by about 3½% in 2022 and will slow to about 2% in 2023 and 2½% in 2024. This forecast is slightly higher than in October.
In Canada, recent economic growth has been stronger than expected and the economy remains in excess demand. Labor markets are still tight: the unemployment rate is near historic lows and businesses are reporting continued difficulties in finding workers. However, there is growing evidence that tight monetary policy slows activity, especially household spending. Consumption growth has slowed since the first half of 2022 and housing market activity has slowed significantly. As the effects of rising interest rates continue to ripple through the economy, spending on consumer services and business investment is expected to slow. Meanwhile, weaker external demand is likely to weigh on exports. This general slowdown in activity will allow supply to catch up with demand.
The bank estimates that Canada’s economy grew by 3.6% in 2022, slightly stronger than forecast in October. Growth is expected to stall by mid-2023, picking up later in the year. The bank expects GDP growth of around 1% in 2023 and around 2% in 2024, little changed from its October outlook.
Inflation eased from 8.1% in June to 6.3% in December, reflecting lower gasoline prices and, more recently, a slowdown in durable goods prices. Despite this progress, Canadians are still feeling the pinch of high inflation in their basic household expenses, with prices for food and shelter steadily rising. Short-term inflation expectations remain high. Annual measures of core inflation are still around 5%, but 3-month measures of core inflation have eased, suggesting that core inflation has peaked.
Inflation is expected to fall significantly this year. Lower energy prices, improvements in global supply conditions and the effects of higher interest rates on demand are expected to reduce CPI inflation to around 3% in the middle of this year and back to the 2% target in 2024.
With persistent excess demand putting continued upward pressure on many prices, the Governing Council decided to increase the key interest rate by another 25 basis points. The Bank’s ongoing quantitative tightening program complements the restrictive stance of the key interest rate. If economic developments develop broadly in line with the MPR outlook, the Governing Council expects to hold the key interest rate at its current level while assessing the impact of cumulative interest rate increases. The Governing Council stands ready to raise the key interest rate further if necessary to return inflation to the 2% target, and remains steadfast in its commitment to restoring price stability for Canadians.
Information note
The next scheduled date for announcing the overnight rate target is 8 March 2023. The Bank will publish its next full outlook on the economy and inflation, including risks to the forecast, in the MPR on 12 April 2023.
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