The Bank of Canada announced today that it is raising its target for the overnight rate to 1%. The official discount rate is 1¼% and the deposit is 1%. The Bank is also finalizing reinvestment and will begin quantitative tightening on April 25. Government of Canada bonds on the Bank’s balance sheet reaching maturity will no longer be replaced, which will reduce the size of the balance sheet over time.
Russia’s continued invasion of Ukraine is causing unimaginable human suffering and a new source of economic uncertainty. Rising prices for oil, natural gas and other commodities are fueling inflation around the world. War -related supply disruptions also exacerbate long -standing supply barriers and weigh on activity. These factors primarily explain the large upward revision of the Bank’s outlook for inflation in Canada.
The war in Ukraine is disrupting the global recovery, as most economies are barely recovering from the impact of the omicron variant of COVID-19. European countries are more directly affected by the effects on confidence and supply shocks resulting from the conflict. China’s economy is dealing with new virus outbreaks and an ongoing correction in the housing market. In the United States, domestic demand remains very strong and the US Federal Reserve has clearly indicated its strong intention to use its monetary policy tools to control inflation. With the reduction in stimulus, growth in the United States should moderate at a pace more commensurate with growth potential. Global financial conditions are tightening and volatility is rising. The Bank now projects global growth of approximately 3½% this year, 2½% in 2023 and 3¼% in 2024.
In Canada, growth is strong and the economy is entering a phase of extreme demand. The labor market is tight and wage growth, which has regained its pace before the pandemic, is on the rise. More and more companies are reporting that they are having difficulty keeping up with demand, and that they can pass on higher input costs to their customers by raising prices. Although the COVID-19 virus continues to mutate and rotate, the high vaccination rate has reduced its health and economic effects. Growth appears to be stronger in the first quarter than expected in January and is expected to increase in the second quarter. With the lift of health measures, consumer spending is rising. The recovery in exports and business investment will continue, supported by strong foreign demand and high commodity prices. Activity in the housing market, which is very strong, is expected to be moderate.
The Bank expects Canada’s economy to grow by 4¼% this year, before slowing to 3¼% in 2023 and 2¼% in 2024. Strong business investment, labor productivity growth and increased immigration will boost productive capacity. of the economy, while higher interest rates should moderate growth of domestic demand.
In Canada, CPI inflation is at 5.7%, beating the forecast for Monetary Policy Report published by the Bank in January. Inflation is driven by higher energy and food prices, as well as supply disruptions accompanied by strong global and domestic demand. The dimensions of core inflation all rise as price pressures become more widespread. The Bank now expects CPI inflation to average almost 6% in the first half of 2022 and remain higher in the scope of inflation control throughout the year. It is then expected to decline to approximately 2½% in the second half of 2023 and return to the 2% target in 2024. There is a growing risk that high inflation expectations will become entrenched. The Bank will use its monetary policy tools to bring inflation back to target and keep inflation expectations anchored.
With the economy entering a phase of excessive demand and inflation that remains above target, the Governing Council believes interest rates need to rise further. The key rate is the main instrument of the Bank’s monetary policy, and quantitative tightening will add increases to this rate. The timing and pace of subsequent policy rate increases will be guided by the Bank’s ongoing assessment of the economy and its commitment to achieving the 2% inflation target.
The next target date for the overnight rate is 1eh June 2022. The Bank will publish its next full projection for the economy and inflation, along with an analysis of the associated risks, in Monetary Policy Report to be released on July 13, 2022.
A notice to the markets providing details on the operational terms of the quantitative tightening will be published this morning on the Bank’s website.