OTTAWA—The Bank of Canada raised interest rates by another 50 basis points (half a percentage point) on Dec. 7, citing an economy that is still overheating with unemployment near historic lows amid ongoing high inflation.
The central bank’s policy interest rate is now 4.25 percent, but language about future interest rate increases was tweaked from October’s statement to suggest less certainty about the need for more rate hikes.
The BoC said, “Governing Council will be considering whether the policy interest rate needs to rise further.” In its Oct. 26 statement, it said “Governing Council expects that the policy interest rate will need to rise further.”
While the bank noted that third-quarter economic growth was stronger than expected, it reported that data since its last quarterly forecasts in October confirmed its outlook that “growth will essentially stall through the end of this year and the first half of next year.”
The BoC has now raised rates by 4 percentage points since March, and the central bank said it is seeing evidence that domestic demand is cooling—housing market activity is declining and consumption moderated in the third quarter.
One bright sign for the Canadian economy, the BoC noted, is that exports of commodities “have been strong.”
Inflation
Consumer price inflation has held steady at 6.9 percent for the past two months. This is down from a peak of 8.1 percent for June; however, the BoC’s estimates of core inflation, which exclude more volatile items, have not come down nearly as much and are hovering around 5 percent per annum.
But the BoC pointed to the three-month rates of change in core inflation coming down as a sign that price pressures are easing.
“However, inflation is still too high and short-term inflation expectations remain elevated,” it said.
The central bank said on Oct. 26 that it projected inflation to come down to the 2 percent target by the end of 2024.
The BoC reiterated its concern about the risk of high inflation becoming entrenched the longer consumers and businesses expect inflation to be above the target.
The central bank said that it is continuing its “quantitative tightening” policy to complement the rate hikes—Government of Canada bonds that it purchased to finance the government’s pandemic spending will be allowed to mature without the maturity proceeds being reinvested in more GoC bonds.
The Bank of Canada’s next interest rate decision is Jan. 25, 2023. It will be accompanied by a new set of quarterly forecasts for growth, inflation, and an assessment of risks.
