The Bank of Canada raised the overnight rate by 75 basis points, taking its policy rate to 3.25 percent from 2.5 percent. Since March, the bank has raised its policy rate by 300 basis points — the fastest pace since the mid-1990s — in a bid to bring inflation back to its set target of two percent. The bank attributes the war in Ukraine, ongoing COVID-19 lockdowns in China and volatile commodity prices as the main drivers of elevated global inflation.
Statistics Canada said inflation rose 7.6 percent in July, from a peak of 8.1 percent in June. The decline is mainly due to the decrease in natural gas prices. However, other price measures for food and services remained high. But the bank said Canada’s core measure of inflation continues to rise, creating a greater risk that rising prices will consolidate. The bank expects further increases in the policy rate will be needed to bring inflation down to that two percent target. “They have set the stage for further rate hikes,” says Kevin Page, president and CEO of the Institute for Fiscal Studies and Democracy at the University of Ottawa. “They should probably raise their policy rate to 4 percent.” In July, the bank raised interest rates by 100 basis points to 2.5%, the highest rate increase since August 1998. During a news conference following the decision, Bank of Canada Governor Tiff Macklem promised a “ soft landing’ for the Canadian economy, while succeeding in the bank’s efforts to bring inflation back under control. “We think there’s a path to a soft landing, but I’ll be very honest, that path is narrowing,” Macklem said during an interview with CTV National News on July 20. Canada’s gross domestic product grew by 3.3 per cent in the second half of 2022, slightly below the bank’s forecast of four per cent. The bank expects growth to continue to slow in the second half of the year, bringing demand back in line with supply in the Canadian economy. The Bank of Canada’s next interest rate announcement is scheduled for October 26.
