Economic update: Bank of Canada July rate increase
While Canadians just saw an interest rate increase in June 2023, the Bank of Canada announced another rate hike in in July. Our colleagues at NEI Investments released an update on the recent increase and the state of the Canadian economy.
Bank of Canada hikes its rate by 25 basis points
On Tuesday July 12, the Bank of Canada (the BoC) announced another interest rate increase of 25 basis point (bps), following its 25-bps increase in June. This lifts the benchmark interest rate to 5%, bringing the benchmark borrowing costs to their highest in 22 years. This announcement was in line with expectations, as the majority of analysts believed additional rate hikes were coming since the BoC resumed raising rates last month after a brief pause in January.
Inflation has been running above the BoC’s 2% target for 27 consecutive months. Although headline inflation has declined in recent months, BoC Governor Tiff Macklem noted that recent declines were primarily due to lower energy prices and base effects, rather than easing inflation due to restrictive policy rates. The BoC said it expects the annual rate of inflation to remain around 3% for the next year, projected to decline to the bank’s 2% target by the middle of 2025. While the announcement didn’t mention future rate hikes specifically, this leaves the door open for further tightening in September.
Monetary tightening has not had much of an impact on growth, as the BoC also revised its 2023 growth forecast from 1.4% in April to 1.8%, while slightly lowering for the forecast in 2024 and 2025. Inflation and interest continue to be a key issue in 2023.
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