Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR) and will likely remain around 8% in the coming months. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest factors, domestic price pressures from excess demand are becoming more apparent. More than half of the items that make up the CPI are now increasing by more than 5%. With this widening of price pressures, the Bank’s core inflation indicators rose between 3.9% and 5.4%. Also, surveys show that more consumers and businesses expect inflation to be higher for longer, increasing the risk that higher inflation will become entrenched in setting prices and wages. If this happens, the economic cost of restoring price stability will be higher. Global inflation is higher, reflecting the impact of the Russian invasion of Ukraine, continued supply constraints and strong demand. Many central banks are tightening monetary policy to fight inflation, and the resulting tighter financial conditions are dampening economic growth. In the United States, high inflation and rising interest rates are helping to slow domestic demand. China’s economy is being held back by waves of restrictive measures to contain the outbreak of COVID-19. Oil prices remain high and volatile. The Bank now expects global economic growth to slow to around 3½% this year and 2% in 2023 before strengthening to 3% in 2024. Further excess demand has accumulated in the Canadian economy. Labor markets are tight with a record low unemployment rate, widespread labor shortages and rising wage pressures. With strong demand, businesses pass on higher input and labor costs by raising prices. Consumption is strong, resulting in a recovery in spending on difficult services. Business investment is steady and exports are boosted by higher commodity prices. The Bank estimates that GDP grew by around 4% in the second quarter. Growth is expected to slow to around 2% in the third quarter as consumption growth moderates and housing market activity eases after unsustainable strength during the pandemic. The Bank expects Canada’s economy to grow by 3½% in 2022, 1¾% in 2023 and 2½% in 2024. Economic activity will slow as global growth moderates and tighter monetary policy permeates the economy. This, combined with the resolution of supply shocks, will bring demand and supply back into balance and ease inflationary pressures. Global energy prices are also forecast to decline. According to the July outlook, inflation will start to ease later this year, falling to around 3% by the end of next year and returning to the 2% target by the end of 2024. With the economy clearly in excess demand, inflation high and widening, and more businesses and consumers expecting high inflation to continue for longer, the Board decided to move higher by raising the policy rate by 100 basis points today. The Governing Council continues to consider that interest rates should rise further and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation. Quantitative tightening continues and complements policy rate hikes. The Governing Council is resolute in its commitment to price stability and will continue to take measures as necessary to achieve the 2% inflation target.
Information note
The next scheduled date for announcing the overnight rate target is 7 September 2022. The Bank will publish its next full outlook for the economy and inflation, including risks to the outlook, in the MPR on 26 October 2022.
