The Bank of
Canada (BoC) announced another rate hike on Wednesday, increasing its overnight
lending rate by 25 basis points.
This marks
the eighth straight rate hike from the BoC since March of last year, part of
the central bank’s fight against soaring inflation, and brings the policy rate
to 4.5%.
“With
persistent excess demand putting continued upward pressure on many prices,
Governing Council decided to increase the policy interest ratee by a further 25
basis points,” the bank said in Wednesday’s announcement.
The rate
hike comes just one week after Statistics Canada announced another
decline-albeit a small one – in the country’s inflation rate. In December,
inflation hit 6.3%, down from November 6.8% and October’s 6.9%. But as several
economists and major banks predicted, the small declines were not enough to
stop the BoC from implementing another rate hike as they try to get inflation
closer to their target of 2%.
“Despite
this progress, Canadians are still feeling the hardship of high inflation in
their essential household expenses, with persistent price increases for food
and shelter,” the BoC said. “Short-term inflation expectations remain elevated.
Year-over-year measures of core inflation are still around 5%, but three-month
measures of core inflation have come down, suggesting that core inflation has
peaked.”
Over the
past few weeks, the consensus among industry experts has been that the January
rate hike will be the central bank’s last one before taking a pause. On
Wednesday, the bank confirmed that stance, saying “If economic developments
evolve broadly in line with the MPR outlook, Governing Council expects to hold
the policy rate at its current level while it assesses the impact of the
cumulative interest rate increases.” The BoC did add that the Governing Council
will increase rates further if necessary, but noted that “inflation is
projected to come down significantly this year.”
The BoC also
noted, however, that although Canada’s economy has seen stronger-than-expected
growth, increasing by 3.6% in 2022, the economy remains in excess demand.
“Labour markets
are still tight: the unemployment rate is near historic lows and businesses are
reporting ongoing difficulty finding workers,” the bank said. “However, there
is growing evidence that restrictive monetary policy is slowing activity,
especially household spending. Consumption growth has moderated from the first
half of 2022 and housing market activity has declined substantially,”
“As the
effects of interest rate increases continue to work through the economy,
spending on consumer services and business investment are expected to slow.
Meanwhile, weaker foreign demand will likely weigh on exports. This overall
slowdown in activity will allow supply to catch up with demand.”
Looking
towards the future, the bank id projecting a 1% growth of GDP in 2023, followed
by a 2% growth in 2024.
Written
By: Laura Hanrahan
Source
By: STOREYS