by Steve Scherer and Ismail Shakil
OTTAWA (Reuters) – The Bank of Canada (BoC) raised its main interest rate by a quarter point on Wednesday, adding concerns that its efforts to bring inflation back to the 2% target could stall due to spending. excessive consumption.
This expected hike brings the target for the overnight rate to 5%, its highest since 2001. In its statement, the BoC gave up saying that the rates were not restrictive enough, but it revised its growth forecasts for this year and pushed back its forecast for target inflation by six months to mid-2025.
“With core inflation measures hovering around 3.5%-4% since last September, underlying price pressures appear more persistent than anticipated,” the Bank of Canada said. Canada. Money markets see the Canadian key rate hit 5.14% in December, compared to 5.08% before today’s announcements. The Canadian dollar strengthened against the greenback, up 0.6%. Despite a rate increase of 450 basis points since March 2022, the economy regained its momentum in May, with a probable growth of 0.4% over the month and after a stagnation in April. The central bank expects real gross domestic product to grow 1.5% in the second quarter, up from an estimated 1.0% in April. Overall, GDP growth is estimated at 1.8% in 2023, compared to a forecast of 1.4% previously.
“A rebalancing of supply and demand is now expected in early 2024, three quarters later than previously anticipated,” the Bank of Canada said in its monetary policy report, also released on Wednesday.
Surprisingly robust demand, higher-than-expected housing costs and a more moderate-than-expected decline in goods prices, excluding food and energy, are fueling inflation, the Bank of Canada said.
“Inflation as measured by the consumer price index is expected to (…) reach 2% by mid-2025. This return to target is later than in the January and April projections. Management remains concerned about the risk that progress towards the 2% target could stagnate, which would jeopardize the restoration of price stability,” the BoC said.
(Steve Scherer and Ismail Shakil, with Fergal Smith in Toronto, Laetitia Volga, editing by Kate Entringer)
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