Canada’s central bank is approaching the end of its monetary tightening cycle, its governor said on Wednesday as policymakers increased the benchmark interest rate by less than economists had expected.
The Bank of Canada raised its key interest rate 0.50 percentage points to 3.75 per cent, taking it to its highest level since 2008. It was the sixth consecutive rate increase this year.
Although Canada is one of the smaller G7 economies, it has moved more quickly to raise rates and is the only country to have implemented a 1 percentage point rate increase. As such, it is seen as something of a forerunner for other central banks that have raised rates aggressively this year and are now discussing when to slow down the pace of increases.
Top officials at the US Federal Reserve have started to talk more openly about shifting to smaller rate rises, with economists forecasting a “downshift” as soon as December.
Economists had expected Canada to implement a larger increase of 0.75 percentage points.
At a press conference, BoC governor Tiff Macklem said there was more work to be done to damp persistent inflation in the country, adding: “This tightening phase will draw to a close,” he said. “We are getting closer, but we’re not there yet.”
He said the BoC expects the “policy rate will need to increase further”, and that future decisions would depend on how the economy responds to the current interest rate environment.
In a statement released alongside Wednesday’s rate increase, the central bank said Canada’s “economy continues to operate in excess demand” and that “labour markets remain tight”.
The BoC said the effects of its rate increases have started to affect the economy, with real estate prices cooling and household spending softening. However, inflation remains persistent. Consumer prices rose 6.9 per cent on an annual basis in September, down from 8.1 per cent in June, a decline mostly driven by lower petrol prices.
The BoC has set a 2 per cent inflation target that it expects to reach by the end of 2024.
“The bank’s preferred measures of core inflation are not yet showing meaningful evidence that underlying price pressures are easing,” the BoC said.
Macklem said the BoC was trying to find a balance between not tightening enough and allowing inflation to become entrenched, or tightening too much, which could adversely effect the labour market and make it challenging for Canadians to pay off debts.
“We are carefully assessing the effects of higher interest rates on economic activity and inflation,” he said.
“With inflation so far above our target, we are particularly concerned about the upside risks,” he added later in a speech.
Macklem said he expected economic growth would “stall in the next few quarters”, and in the second half of 2023 the economy would “grow solidly, and the benefits of low and predictable inflation will be restored”.
Source: Economy - ft.com
