With this likely being their final increase, the Bank of Canada has raised its benchmark interest rate to 4.25%.
The Bank of Canada might be finished raising interest rates.
Some Bay Street economists were caught off guard when Governor Tiff Macklem announced a half-point increase to the benchmark interest rate on December 7. They had anticipated that the central bank would choose to gradually increase rates in order to prevent economic damage.
However, as many experts predicted, the Bank of Canada will press on with its attack against the worst inflation scare since the 1980s. Returning to a more typical quarter-point change in policy would have signalled that Canada’s central bankers were losing their nerve, increasing the likelihood that large segments of the population would come to the conclusion that inflation wouldn’t be coming down.
With the benchmark interest rate now 4.25 percent, four percentage points higher than at the start of the year, Macklem offered something to appease both groups, demonstrating his determination to crush price pressures with another “jumbo” increase while also signalling that he is prepared to pause and assess.
It was stated in the statement that “the Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target.”
It’s a change from previous statements that made it clear interest rates were going up regardless of what happened.
The Bank of Canada has recently suggested that interest rates of 4.25 percent may represent a “sweet spot,” as this level will discourage households from continuing their post-pandemic spending spree without possibly weakening demand to the point where it causes an increase in unemployment.
Going forward, the central bank’s actions will be based on data, rather than a predetermined path in which the only question before a policy meeting was “how high?” Depending on how the data shakes out in the next six weeks, Macklem and his deputies will consider pausing when they next meet before making their decision on January 25.
Tighter monetary policy is slowing demand, supply issues are being resolved, and inflation and inflation expectations are being monitored by the Governing Council.
To put it simply, growth will stall through the rest of this year and the first half of next. A recession seems likely given the current economic slowdown.
In spite of being the primary factor in economic growth for more than a decade, housing investment has plummeted this year as the central bank has taken its most aggressive path to higher interest rates in its history. Total consumer spending, which makes up nearly 60% of GDP, fell in the third quarter.
The Bank of Canada, however, has decided to take the chance of a recession if it means bringing inflation under control. According to the central bank, “data since the bank’s outlook that growth will essentially stall through the end of this year and the first half of next year” justify the latest policy decision.
It’s good news for a central bank whose job it is to maintain price stability, but it’s not enough. Although it has fallen from its summer high of 8.1 percent, the consumer price index is still well above the Bank of Canada’s target of two percent annual increases.
Surging commodity prices and supply shortages pushed inflation last year beyond the Bank of Canada’s target range. However, those price hikes are now being reflected in the products and services that consumers typically use. “Core” inflation, which subtracts out the effects of volatility and gives a clearer picture of the trend, is also hovering around five percent, well above the target.
A higher risk of persistently high inflation exists if consumers and businesses alike anticipate inflation to remain above the target rate for an extended period of time, the statement warned.
The labour unions have been unusually vocal in their opposition to the central bank’s insistence on meeting its inflation target, so Macklem’s decision is sure to be contentious.
Yet the Bank of Canada is confident that a temporary slowdown in economic activity over the next few months is preferable to what might follow a period of higher inflation.
Governing bodies noted that third-quarter growth was “stronger than expected,” and that the economy is “operating in excess demand” even now. This indicates that the economy was robust enough to weather the storm of higher interest rates. Given that inflation was so far off track, the central bank had to increase these headwinds.
Canada’s price stability will be restored, and the government is “resolutely committed” to hitting its 2% inflation target, according to a statement.