The global and Canadian economy are broadly developing in line with the Bank’s July forecast. The effects of the COVID-19 outbreaks, ongoing supply disruptions and the war in Ukraine continue to dampen growth and boost prices. Global inflation remains high and measures of core inflation are on the rise in most countries. In response, central banks around the world continue to tighten monetary policy. Economic activity in the United States moderated, although the US labor market remains tight. China faces ongoing challenges from the COVID shutdowns. Commodity prices were volatile: oil, wheat and lumber prices moderated while natural gas prices rose. In Canada, CPI inflation eased in July to 7.6% from 8.1% as gasoline prices fell. However, inflation excluding petrol rose and the data point to further widening of price pressures, particularly in services. The Bank’s core inflation indicators continued to move higher, ranging from 5% to 5.5% in July. Surveys show that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation will take hold. The Canadian economy continues to operate on excess demand and labor markets remain tight. Canada’s GDP grew 3.3% in the second quarter. Although this was somewhat weaker than the Bank had forecast, indicators of domestic demand were very strong – consumption rose by around 9½% and business investment increased by close to 12%. With higher mortgage rates, the housing market is slowing as expected, after unsustainable growth during the pandemic. The Bank continues to expect the economy to moderate in the second half of this year as global demand weakens and tighter monetary policy here in Canada begins to align demand more closely with supply. Given the outlook for inflation, the Governing Council still believes that the policy rate should rise further. Quantitative tightening complements policy rate hikes. As the effects of tighter monetary policy work their way through the economy, we will assess how much higher interest rates need to rise for inflation to return to target. The Governing Council remains resolute in its commitment to price stability and will continue to take measures as necessary to achieve the 2% inflation target.
Information note
The next scheduled date for announcing the overnight rate target is 26 October 2022. The Bank will publish its next full outlook for the economy and inflation, including risks to the outlook, in the MPR at the same time.
