Inflation in Canada hit a 31-year high at 6.7% in March, its 12th consecutive month above the Bank of Canada's 1-3% control range and more than triple the 2% target. "We need our policy rate to be at more neutral levels." "Our policy rate, at 1%, is too stimulative, especially when inflation is running significantly above the top of our control range," Gravelle said.
Simon Harvey, senior FX analyst at Monex Canada commented “The Bank of Canada has just doubled down on their view that they will be hiking prior to the Federal Reserve and that the QE tapering is just evidence of this.OTTAWA, May 12 (Reuters) - The Bank of Canada's policy rate, at 1%, is "too stimulative" given soaring inflation and needs to return to more neutral levels "quickly," an official said on Thursday, while downplaying the likelihood of a supersized increase.ĭeputy Governor Toni Gravelle, speaking to economists in Montreal, also said the central bank would likely revise up its near-term inflation projections, as the "perfect storm" of global and domestic price increases continue to persist. Most investment banks had expected the guidance on an interest rate to be left unchanged. High prices could result in stretched borrowing and lending, leaving some households and financial institutions more financially vulnerable to an economic downturn.” The central bank also warned over risks within the housing sector amid a high level of borrowing It warned “This poses several risks. Previously, the bank did not expect that interest rates would be increased until 2023. “Based on the Bank’s latest projection, this is now expected to happen some time in the second half of 2022.” The bank has, however, adjusted the expected timetable for this to be achieved. The bank maintained the commitment to maintain interest rates at current levels until inflation reaches 2% on a sustained basis. The Bank expects CPI inflation to ease back toward 2 percent over the second half of 2021 as these base-year effects diminish, and inflation is expected to ease further because of the ongoing drag from excess capacity The inflation rate is projected to move above the 1-3% target band in the short term, especially given the impact of base effects. Typically the bank is quite cautious.” Inflation to Meet Target Next Year I’m not saying it’s an unreasonable call. I would actually regard the Bank of Canada as arguably the most optimistic forecasters out there now, at least for this year.
Overall, there were upward revisions to the growth profile with the Bank now forecasting real GDP growth of 6.5% in 2021, moderating to around 3.75% in 2022 and 3.25% in 2023.ĭoug Porter, Chief economist at BMO Capital Markets noted the growth upgrades “What’s a surprise here though, is that they framed it as due to economic progress. Strong growth in foreign demand and higher commodity prices are expected to drive a robust recovery in exports and business investment. In this context, it stated that “The recovery remains highly dependent on the evolution of the pandemic and the pace of vaccinations.” There was still an element of caution, especially in view of recent coronavirus developments. GDP Forecasts UpgradedĪccording to the bank, the outlook has improved for both the global and Canadian economies. The potential timing of an interest rate increase was brought forward to 2022 from 2023 which triggered a surge in the Canadian dollar. The central bank also announced that it would cut the amount of weekly bond purchases to C$3.0bn from C$4.0bn from April 26th, also in line with market expectations. The Bank of Canada held interest rates at 0.25% following the latest policy meeting, in line with consensus forecasts. The Canadian Dollar has rallied sharply against the Pound (CAD/GBP +1.02%), Euro (CAD/EUR +1.01%) and US Dollar (CAD/USD +1.05%) following the Bank of Canada's monetary policy press conference on Wednesday.
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