Market: Bank of Canada raises its key rate to 5%

by Steve Scherer and Ismail Shakil

OTTAWA (Reuters) – The Bank of Canada (BoC) raised its key interest rate by a quarter of a point on Wednesday, adding to concerns that its efforts to bring inflation back to the 2% target could be stalled by spending.

This expected increase brings the overnight rate target to 5%, the highest since 2001. In its statement, the BoC stopped short of saying interest rates were not restrictive enough, but it revised its growth forecasts for this year and pushed its forecast behind target inflation by six months to mid-2025.

“With core inflation readings around 3.5%-4% since last September, underlying price pressures appear to be more persistent than expected,” the Bank of Canada said. Canada. Money markets see the Canadian key rate hit 5.14% in December compared to 5.08% before today’s announcements. The Canadian dollar has strengthened against the dollar with an increase of 0.6 per cent. Despite a 450 basis point interest rate hike since March 2022, the economy regained its momentum in May with growth likely at 0.4% over the month and after stagnation in April. The central bank expects real gross domestic product to grow by 1.5% in the second quarter, up from an estimated 1.0% in April. Overall, GDP growth is estimated at 1.8% in 2023, compared to a forecast of 1.4% previously.

“A rebalancing of supply and demand is now expected in early 2024, three quarters later than previously expected,” the Bank of Canada said in its monetary policy report, also released Wednesday.

Surprisingly robust demand, higher-than-expected housing costs and a more moderate-than-expected decline in commodity prices, excluding food and energy, are fueling inflation, the Bank of Canada said.

“Inflation as measured by the consumer price index is expected (…) to reach 2% by mid-2025. This return to the target is later than the January and April projections. Management remains concerned about the risk that progress towards 2 .% target could stagnate, jeopardizing the restoration of price stability,” the BoC said.

(Steve Scherer and Ismail Shakil, with Fergal Smith in Toronto, French Editing by Laetitia Volga, Editing by Kate Entringer)

Copyright © 2023 Thomson Reuters

Leave a Comment