Today, the Bank of Canada increased its overnight benchmark interest rate by 50 basis points to 3.75% from 3.25% in September. This is the sixth time this year that the Bank has tightened the money supply to quell inflation, so far with limited results.

Some economists had assumed the increase this time around would be higher, but the BoC decided differently based on its expert economic analysis. We summarize the Bank’s observations below, including its all-important outlook:

Inflation at home and abroad

Inflation around the world remains high and broadly based reflecting the strength of the global recovery from the pandemic, a series of global supply disruptions, and elevated commodity prices

Energy prices particularly have inflated due to Russia’s attack on Ukraine

The strength of the US dollar is adding to inflationary pressures in many countries

In Canada, two-thirds of Consumer Price Index (CPI) components increased more than 5% over the past year

Near-term inflation expectations remain high, increasing the risk that elevated inflation becomes entrenched

Economic performance at home and abroad

Tighter monetary policies aimed at controlling inflation are weighing on economic activity around the world

In Canada, the economy continues to operate in excess demand, and labour markets remain tight while Canadian demand for goods and services is “still running ahead of the economy’s ability to supply them,” putting upward pressure on domestic inflation

Canadian businesses continue to report widespread labour shortages and, with the full reopening of the economy, strong demand has led to a sharp rise in the price of services

Domestic economic growth is “expected to stall” through the end of this year and the first half of next year as the effects of higher interest rates spread through the economy

The Bank projects GDP growth will slow from 3.25% this year to just under 1% next year and 2% in 2024

In the United States, labour markets remain “very tight” even as restrictive financial conditions are slowing economic activity

The Bank projects no growth in the US economy “through most of next year”

In the euro area, the economy is forecast to contract in the quarters ahead, largely due to acute energy shortages

China’s economy appears to have picked up after the recent round of pandemic lockdowns, “although ongoing challenges related to its property market will continue to weigh on growth”

The Bank projects global economic growth will slow from 3% in 2022 to about 1.5% in 2023, and then pick back up to roughly 2.5% in 2024 – a slower pace than was projected in the Bank’s July Monetary Policy Report

Canadian housing market

The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy including housing

Housing activity has “retreated sharply,” and spending by households and businesses is softening

Outlook

The Bank noted that its “preferred measures of core inflation” are not yet showing “meaningful evidence that underlying price pressures are easing.” It did however offer the observation that CPI inflation is projected to move down to about 3% by the end of 2023 and then return to its 2% target by the end of 2024. This presumably would be achieved as “higher interest rates help rebalance demand and supply, price pressures from global supply chain disruptions fade, and the past effects of higher commodity prices dissipate.”

As a consequence of elevated inflation and current inflation expectations, as well as ongoing demand pressures in the economy, the Bank’s Governing Council said to expect that “the policy interest rate will need to rise further.”

The level of such future rate increases will be influenced by the Bank’s assessments of “how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding.”

In case there was any doubt, the Bank also reiterated its “resolute commitment” to restore price stability for Canadians and said it will continue to take action as required to achieve its 2% inflation target.

December 7, 2022, is the BoC’s next scheduled policy interest rate announcement. First National will follow the Bank’s commentary and outlook closely and provide an executive summary on our website the same day. For other capital market insights, please visit the Resources page of our website on a regular basis.