While the majority of economists predicted the opposite, now the Bank of Canada (BoC) has just raised its key rate again by 25 basis points, taking it to 4.75%, its highest level in 22 years.
Worse still: many economists are even expecting the Bank of Canada to once again raise its rate by another 25 basis points on July 12, with a view to bringing it to 5.0%.
This is another blow for consumers and businesses that are struggling with relatively high debts. All the more difficult since many of them were even expecting a certain loosening of Canadian monetary policy.
Well, no! Instead, we are entitled to another tightening of all borrowings: personal loans, lines of credit, mortgages, business loans, etc.
For what?
What are BoC Governor Tiff Macklem and the big monks around him relying on this time to raise the key rate by 25 basis points?
In their view, the Canadian economy was stronger than expected in the first quarter of 2023. Gross domestic product (GDP) growth reached 3.1%, thanks in particular to consumption growth which was “surprisingly strong and widespread” as well as the demand for services which “continued” to recover.
“In addition, spending on interest-sensitive assets has increased and, more recently, activity in the housing market has firmed up.”
Another factor mentioned by the BoC to justify its decision to increase its key rate: “The labor market remains tight: proof that the strong demand for labor is continuing, employers are quick to recruit new workers who come with the increase in immigration and the activity rate.”
Added to this is the inflation rate which, instead of falling in April, rose slightly to 4.4%.
Of course, we are far from the 8.1% inflation that was reached a year ago, in June 2022.
But despite the decline in energy prices, the Bank of Canada still believes that inflation is still too high. Not just here, but also around the world, notably in the United States, where consumption remains, according to the Bank of Canada, surprisingly resilient and the labor market tight.
Towards the target
Currently, the Bank of Canada estimates three-month “core inflation” measures to hold between 3.5% and 4% due to excess demand.
This is obviously well above the damn inflation target of 2% targeted by our central bank.
Let’s remain optimistic all the same, because the Bank expects inflation to end up falling to around 3% during the summer.
If that were to happen, the Governing Council of the Bank of Canada should stop raising its key rate.
And when could it begin to loosen its monetary policy? At the beginning of 2024, dare we wish!
