The Bank of Canada (BoC) raised the overnight rate to 4.5%, while stating that it will continue with Quantitative Tightening (QT).
On rising prices, it stated that “inflation is projected to come down significantly this year. Lower energy prices, improvements in global supply conditions, and the effects of higher interest rates on demand are expected to bring CPI inflation down to around 3% in the middle of this year and back to the 2% target in 2024.”
On economic growth, the Bank stated that “recent economic growth has been stronger than expected and the economy remains in excess demand. Labour markets are still tight…However, there is growing evidence that restrictive monetary policy is slowing activity, especially household spending.”
On the future path of policy, the Bank noted that “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.”
Key Implications
The BoC’s first meeting of 2023 looks to be the last in which it will raise its policy rate. Heading into today, the Bank had communicated that it could go either way with today’s decision – deciding between a final hike or a pause. Given the robustness of consumer spending and employment trends, the BoC clearly felt it needed this final hike to solidify the turn in economic momentum.
Looking at the Bank’s forecast, the economy is set for a consumer led slowdown, with GDP likely to “stall through the middle of 2023.” Greater conviction in this has also led the BoC to cut its inflation forecast. With the belief that the economy is on the path to price stability, the BoC can now step to the sidelines and let its restrictive policy filter through the economy. Though it does have the option to hike again should inflation prove uncooperative, we are expecting it to hold rates at this level for most of 2023, before cutting at the end of the year to drive a better balance between interest rates being too far in restrictive territory and a weakening economy.
