The strong growth in consumer spending and the rise in the inflation rate in April for the first time in ten months convinced the Bank of Canada to resume the rise in interest rates interrupted in January.
This is revealed by the minutes of the deliberations of the central bank’s board of directors on June 7, which led to the increase in the key rate from 4.50% to 4.75%.
“Another rate hike was in order,” concluded the steering committee members, who had already juggled raising the policy rate in their previous decision in April and opted to wait.
The Bank of Canada, which expected economic growth of 2.3% in the first quarter, was surprised by the 3.1% growth that was recorded. Despite successive interest rate hikes, consumer spending rose 5.8% during this period, boosted not only by services, but also by interest-rate-sensitive goods, such as automobiles, furnishings and other household items.
The central bank also expected inflation measured by the Consumer Price Index to continue to decline, as the rate rose from 4.3% in March to 4.4% in April.
“It will probably take longer than expected before supply and demand rebalance,” the central bank now estimates, although it maintains its forecast that inflation will decline to 3% this summer.
In its statement announcing that the pause was over and that the key rate would drop from 4.5% to 4.75%, the Bank of Canada expressed concern about the possibility “that inflation will remain stuck well above the 2% target”.
The monetary authorities are now evaluating the possibility of proceeding with another hike in the key rate on July 12. By then, it will have had a new reading of the inflation rate (May) and a new assessment of the labor market (June).
The Canadian economy continues to give mixed signals about its state of health. The labor market appeared to slow in May and the unemployment rate rose slightly, from 5% to 5.2%.
Today (Wednesday), Statistics Canada reports that retail sales remain strong and jumped 1.1% in April, following two consecutive monthly declines. “Today’s retail data only strengthens our forecast for another 25 basis point hike in the policy rate in July,” Desjardins economists said.
