Canada: Bank of Canada hikes rates by 75 basis points in September
On 7 September, the Bank of Canada (BoC) raised its target for the overnight rate from 2.50% from 3.25%, marking the fifth consecutive rate hike this year.
The decision aimed to curb inflation, which—excluding a dip in gasoline price pressures—rose in July. The Bank also pointed out recent increases in core inflation, which is indicative of excess demand in the economy. The aggressive rate hike was designed to keep inflation expectations anchored; the Bank underlined that short-term inflation expectations have remained elevated.
In its forward guidance, the Bank reiterated that interest rates would need to continue to rise in order to ensure inflation converges to the 2.0% target. The Consensus is currently for a cumulative hike of slightly more than 50 basis points by end-2022, although estimates range from 25 to 75 basis points.
Analysts at the EIU commented on the outlook:
“The BoC will face a difficult balancing act in 2023 as it tries to put inflation on a firm downward trajectory without causing borrowing costs to rise in a way that would overly burden the financial health of households and businesses. We now expect the BoC to raise its overnight rate by another 50 basis points in October (we had previously expected a rise of 25 basis points), before returning to a more typical 25-basis-point increase in December. If inflation remains high, additional 25-basis-point rises are possible in 2023 […].”
The BoC’s next policy announcement will be on 26 October.