Against expectations, Bank of Canada governor Tiff Macklem raised borrowing costs on Wednesday by another 25 basis-points, bringing the overnight rate from 4.5% to 4.75%.
Although policy makers acknowledged consumer prices are declining in line with lower global energy prices, they pointed to a stubbornly high core inflation rate as the main reasoning to continue their resolve towards price stability. Meanwhile, the Canadian economy has shown unexpected strength in the first three months of 2023, with a GDP growth rate of 3.1%. This growth is largely due to strong and wide-ranging consumption, even after adjusting for population increases.
Demand for services is rebounding, spending on interest-sensitive goods is rising, and there is a resurgence in housing market activity. The labor market remains tight, with high immigration and participation rates contributing to an expanded labor supply. However, new entrants to the job market are being rapidly employed, demonstrating the continued high demand for labor.
“Overall, excess demand in the economy looks to be more persistent than anticipated,” the Bank of Canada wrote in a statement.
The central bank anticipates CPI inflation will fall to about 3% by summer as lower energy prices take effect and the impact of last year’s price increases fades from annual data. “However, with three-month measures of core inflation running in the 3½-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target,” policy makers led by Governor Tiff Macklem conceded.
Thanks to the bank’s poor economic forecasting, policy makers admitted their monetary measures haven’t been restrictive enough to realign supply and demand and bring inflation back to the target range.
Going forward, the bank keeps promising to keep watch on price pressures, emphasizing once again “its commitment to restoring price stability for Canadians”— something we have all heard before.
Information for this story was found via the Bank of Canada. 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.
