Key Takeaways:
- The Bank of Canada increased its key overnight interest rate by 50 basis points to 1.5 percent and said it would tighten monetary policy.
- The Bank also plans to stick to its quantitative tightening approach by selling the Government of Canada assets it bought during the outbreak.
The Bank of Canada has raised its key overnight interest rate by 50 basis points to 1.5 percent and will continue to tighten its monetary policy. The rate increase comes as the Bank anticipates greater inflation in the short term before beginning to reduce.
The Bank of England says it will keep raising interest rates to battle inflation, and it is “prepared to act more firmly if necessary to satisfy its commitment to reach the 2% inflation objective.”
The Bank considers that “the risk of elevated inflation being entrenched has increased” because 70% of the Consumer Price Index subcategories, a key gauge of inflation, are over 3%. The CPI rose to 6.8% in April, the highest in 31 years.
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High inflation is also on the way, according to the Bank, as the global economy begins to stall as a result of the war in Ukraine, China’s COVID lockdowns, and ongoing supply disruptions. The crisis in Ukraine has put a lot of pressure on energy and agricultural commodities in particular, which the Bank expects will have a detrimental impact on the European economy.
Despite the bleak global outlook, the Bank of Canada claims that the Canadian economy is currently “obviously running in excess demand.” They cite substantial market activity as seen by GDP growth of 3.1 percent in the first quarter of 2022, widespread labor shortages, and pay growth. The Bank also forecasts “strong” growth in the 2nd quarter of 2022.
The housing market, which the Bank feels is falling from “exceptionally high levels,” is one component of the Canadian economy that is beginning to show indications of cooling.
The Bank also intends to keep its quantitative tightening strategy by selling Government of Canada bonds that it acquired during the outbreak. The Bank’s balance sheet reached in December 2021, with $435 billion in bonds on the books, but by the end of April 2022, it had dropped to $417 billion. In March 2020, the Bank possessed $80 billion in bonds before the pandemic.
Despite its plans to reduce the number of bonds it owns, the Bank sees interest rate hikes as its “primary monetary policy tool, with quantitative tightening serving as a complementary one.”
On July 13th, the upcoming rate announcement will be made.
Source: CTV News
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