West News Wire: Even though it predicted the economy might shortly enter a modest recession, the Bank of Canada announced a smaller-than-expected interest rate increase and stated that additional increases were still required.

The central bank raised its policy rate by 0.5 percentage points on Wednesday, reaching a 14-year high but falling short of demands for an additional 75 basis point increase. One of its swiftest tightening cycles ever, it has increased rates by 350 basis points since March.

“This phase of tightening will come to an end. In prepared remarks read in advance of a news conference, Governor Tiff Macklem remarked, “We are getting there, but we are not there yet.

How much higher rates need to go “will depend on how monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding,” he said.

Macklem added that the central bank was still far from its goal of low, stable and predictable inflation at 2 percent, but was trying to balance the risks of under- and over-tightening.

“It was a bit of a surprise,” Michael Greenberg, portfolio manager at Franklin Templeton Investment Solutions, said of the rate decision. Inflation, he explained, was clearly still a problem and more hikes were likely.

“It just seems like the concerns around the economic fallout and the financial stability fallout of raising rates so aggressively is maybe starting to weigh on the and hence they took their foot off the brakes just a little bit,” he said.

The bank said in its quarterly Monetary Policy Report that growth would stall later this year and early next year, which “suggests that a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth.”

Read More
US economy down again from April through June

A technical recession, which consists of two consecutive quarters of negative growth, is possible between the fourth quarter of 2022 and the end of the second quarter of 2023, the forecasts showed.

That darkening outlook likely influenced the decision to go with the 50 basis points hike although the warning that rates still need to rise further “takes a little bit of an edge off”, said Doug Porter, chief economist at BMO Capital Markets.

While the bank said elevated inflation and inflation expectations along with ongoing demand pressures meant that the policy rate would need to go higher, it added new language around how those increases would be determined.

“Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving and how inflation and inflation expectations are responding,” it said.

While core inflation, which excludes volatile goods like energy and food, has dropped to 6.9 percent in September from a peak of 8.1 percent in June, price rises for these categories have remained steady. On the basis of declining commodity prices and fewer supply chain interruptions, the central bank revised downward its inflation outlook.

The bank stated that by the end of 2023 and the end of 2024, respectively, “inflation is forecast to return to the top of the 1 percent to 3 percent control range and to the 2 percent target.”

LEAVE A REPLY

Please enter your comment!
Please enter your name here