As was widely expected, the Bank of Canada raised its overnight rate by another 25 basis points, bringing the cost of borrowing to 5%.
Following last month’s quarter-point rate increase, policy makers decided to maintain the central bank’s resolute of tackling runaway inflation following a brief pause in May. Citing strong demand and a tight labour market as the culprit behind persistent inflation, the Bank of Canada acknowledged the consumer is more resilient than expected, particularly in the US.
Although policy makers are forecasting a slowdown in consumer spending in response to higher interest rates, incoming economic data suggests there continues to be excess demand in the economy. “Strong population growth from immigration is adding both demand and supply to the economy: newcomers are helping to ease the shortage of workers while also boosting consumer spending and adding to demand for housing,” the bank’s statement reads.
The housing market is witnessing a revival, with new construction and real estate listings trailing behind demand, thus adding to price pressures. The labour market is tight, and wage growth is hovering around 4% to 5%.
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Higher interest rates are predicted to slow economic growth to around 1% through the second half of this year and the first half of next year, implying real GDP growth of 1.8% in 2023 and 1.2% in 2024. A modest excess supply is expected early next year before growth rebounds to 2.4% in 2025.
Inflation in Canada dropped to 3.4% in May from a high of 8.1% last summer. Although CPI inflation has largely decreased as expected, the downward momentum is primarily driven by lower energy prices rather than a reduction in underlying inflation. The Bank’s business surveys reveal that businesses are still increasing their prices more frequently than usual, indicating more persistent underlying price pressures.
“Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation,” the bank continued in its statement. “In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2% inflation target.”
Information for this story was found via the BoC. The author has no securities or affiliations related to the organizations discussed. Not a recommendation to buy or sell. Always do additional research and consult a professional before purchasing a security. The author holds no licenses.
