The Bank of Canada has decided higher borrowing costs are needed
The trend-setting policy interest rate has been increased from 4.5% to 4.75%
By Mark Parsons, ATB Economics 7 June 2023 1 min read
The Bank of Canada announced today that it was increasing its trend-setting policy interest rate from 4.5% to 4.75%.
The Bank cited stronger-than-expected economic growth in the first quarter and stubbornly high underlying inflation readings.
Going forward, it will adopt a wait-and-see approach to interest rates based on the data and is “resolute in its commitment to restoring price stability.”
In April, the Bank signalled a conditional pause as it assessed the lagged impacts of higher interest rates on the economy. Following a 400 basis point (4 percentage points) increase between March 2022 and January 2023, the bank had been on hold.
In today’s announcement, concern that the inflation rate will not return to the 2% target by next year led the Bank to adjust the policy rate up rather than wait for more data.
While there was growing speculation that another rate increase was on the table, many economists (ourselves included) had expected the Bank would wait for more data, with a potential rate increase in July.
According to the Bank’s reading of the evidence on hand, “excess demand in the economy looks to be more persistent than anticipated.” As a result, the Bank is worried “CPI inflation could get stuck materially above the 2% target.”
The Bank’s next fixed announcement date* is set for July 12 with two sets of monthly Labour Force Survey results and one Consumer Price Index report coming out before then that the Bank can use to inform its decision.
There are, as always, a lot of moving parts, but the Bank will be looking for some cooling of the labour market and underlying price pressures.
*Each year, the Bank of Canada sets eight fixed dates on which it announces whether or not it will change its policy interest rate. There are four more dates in the 2023 calendar: July 12, September 6, October 25, and December 6.
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