The Bank of Canada will raise interest rates by a quarter-point for a second straight meeting to 5.00% on July 12, following a five-month pause earlier this year. That will take the key policy rate to a new 22-year high and signal that more hikes are likely ahead. The move is unlikely to derail the economy as it will be a relatively modest increase but will underscore how persistently price pressures have lingered in an economy still performing well.
The central bank has fended off economic weakness and a slowdown in household spending. However, weak business investment erodes the capacity of the economy to generate future growth. It also dampens inflationary pressures as fewer goods and services are available.
While the bank focuses on keeping inflation in check, it weighs several factors when making its next decision. One factor is the possible impact of the financial turmoil in Europe and the United States, which could dampen global demand and weigh on the economy. Another is a rebound in oil prices that could boost inflation.
Finally, the central bank is examining a slew of data ahead of its meeting, including two monthly batches of jobs numbers, another reading on inflation, April gross domestic product, and estimates for May output. It also will take into account consumer and business expectations.
Despite the recent banking sector stress, most economists expect the Bank of Canada to raise rates by 25 basis points on July 12, ending a conditional pledge made in January to pause and assess how more than 400 basis points of tightening had impacted the economy.
Earl Davis, head of fixed income at BMO Global Asset Management, and Frances Horodelski, guest co-host on BNN Bloomberg, join the program to discuss whether further tightening is in store for Canada.
The Bank of Canada carries out monetary policy by influencing short-term interest rates and adjusting its target for the overnight rate on eight fixed dates each year. It also publishes a quarterly monetary policy report detailing its previous decision and why it chose that path.
The most recent monetary policy statement, published on March 27, highlighted the risk that rising prices would overheat the economy and derail the bank’s goal of achieving its 2% inflation target by 2024. It also pointed to elevated three-month moving averages of underlying price pressures. The bank’s governor and officials have said they will wait until “accumulated evidence” that the economy has cooled and inflation has come down to target levels. Inflation slowed to 3% in May from 4.4% the prior month but is well above the bank’s 2% target and not expected to return there until early 2024. That leaves plenty of room for further tightening.
