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The Bank of Canada increased rates by 50 basis, less than the 75 basis points expected. The hike brought its target for the overnight rate to 3¾%, with the Bank Rate at 4% and the deposit rate at 3¾%. The Bank is also continuing its policy of quantitative tightening.
In a day of US dollar selling the USDCAD pair sold-off. The greenback was hit broadly and the smaller than expected hike from the BOC did little to stem the bleeding.
The central bank noted that the strength of the US dollar is adding to inflationary pressures in many countries. Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world. As economies slow and supply disruptions ease, global inflation is expected to come down.
The Bank projected no growth in the US economy through most of next year. They said that the euro area, the economy is forecast to contract in the quarters ahead, largely due to acute energy shortages.
And they stated that China’s economy appears to have picked up after the recent round of pandemic lockdowns, although ongoing challenges related to its property market will continue to weigh on growth.
In terms of forecasts, the Bank projects that global growth will slow from 3% in 2022 to about 1½% in 2023, and then pick back up to roughly 2½% in 2024.
Touching on domestic policy, the central bank said that the economy continues to operate in excess demand and labour markets remain tight. The demand for goods and services is still running ahead of the economy’s ability to supply them, putting upward pressure on domestic inflation.
Businesses continue to report widespread labour shortages, and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services.
In the last three months, Canadian CPI inflation has declined from 8.1% to 6.9%, primarily due to a fall in gasoline prices. However, price pressures remain broadly based, with two-thirds of CPI components increasing more than 5% over the past year.
The Bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing. Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched.
Additionally, it was noted that “Quantitative tightening is complementing increases in the policy rate. We are resolute in our commitment to restore price stability for Canadians and will continue to take action as required to achieve the 2% inflation target.”
The next scheduled date for announcing the overnight rate target is December 7, 2022. The Bank will publish its next full outlook for the economy and inflation, including risks to the projection, in the MPR on January 25, 2023.
