The Bank of Canada pulls the trigger more and raises interest rates by a quarter point, which places them at 5%, the highest level in the North American country since March 2001, in the face of persistent inflation. It is the tenth time since January 2022 that the Canadian central bank has increased interest rates to control inflation, which reached 8.1% in June 2022 and stood at 3.4% in May. The Canadian monetary authority justified the decision by strong demand and labor shortages that “are causing persistent inflationary pressures on services.”
The Bank of Canada also said in a statement that the strength of the national economy has exceeded expectations with consumption growth “surprisingly strong” at 5.8% in the first quarter. “Although the Bank expects consumer spending to slow down in response to the cumulative increase in interest rates, recent retail trade data among others suggests that excess demand persists in the economy,” the monetary authority added.
The central bank expects economic growth to slow to around 1% in the second half of the year and the first half of 2024, which will mean an increase in Gross Domestic Product (GDP) of 1.8% in 2023, from 1 2% in 2024 and 2.5% in 2025 slower than expected.
“The governing council continues to prefer that progress towards the 2% target could be halted, jeopardizing a return to price stability,” the Bank of Canada explained. The Bank of Canada was one of the first in the world to launch a monetary policy offensive with high inflation running rampant in early 2022. The bank responded forcefully by raising its interest rate from 0.25% a year ago to 5 % current, that is, 475 basic points of escalation that mark a record in its policy.