The Bank of Canada is raising its key rate by 25 basis points to 4.75% because it believes previous increases will not be enough to bring inflation back to the 2% target.
“Based on the accumulation of data, the Governing Council decided to raise the policy rate, judging that monetary policy was not restrictive enough to restore the balance between supply and demand and ensure a return to the 2% inflation target,” the central bank said in its statement.
This decision was eagerly awaited because the Canadian economy is showing no signs of slowing down and inflation is still resisting the eight key rate hikes. Several economists predicted that the central bank would be forced to end its pause and resume the cycle of rate hikes. Some had expected a hike today, but most were expecting a hike in the policy rate at the next rate announcement in July.
Inflation measured by the Consumer Price Index was 4.4% in April and the Bank of Canada wants to reduce price inflation to 3% this summer.
The Bank of Canada finds that nothing is going as planned. “In Canada, the economy was stronger than expected in the first quarter of 2023, with gross domestic product growth reaching 3.1%. Consumption growth has been surprisingly strong and broad-based, even taking into account the contribution of population growth. Demand for services continued to recover. In addition, spending on interest-sensitive goods has increased and, more recently, activity in the housing market has firmed up. The labor market remains tight: proof that the strong demand for labor continues, employers are quick to recruit the new workers who come with the increase in immigration and the rate of participation. Overall, excess demand in the economy appears more persistent than anticipated.”
