(Kitco News) The Bank of Canada raised rates by another 50 basis points, taking its key interest rate to 1.5%. The Bank also warned that inflation would get worse before easing.
"The risk of elevated inflation becoming entrenched has risen," the Bank of Canada said in a statement Wednesday. "In Canada, CPI inflation reached 6.8% for the month of April – well above the Bank's forecast – and will likely move even higher in the near term before beginning to ease," the Bank of Canada said in a statement Wednesday.
Canada's central bank sounded even more hawkish this time around, stating that it is prepared "to act more forcefully if needed to meet its commitment to achieve the 2% inflation target."
In April, the Bank of Canada already raised rates by 50 basis points, which marked the biggest hike in two decades. Also, it started the process of quantitative tightening — letting the purchased bonds mature and roll off.
Problematic inflation comes when the global economy is slowing, the Bank noted in the statement.
"The Russian invasion of Ukraine, China's COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe … Global financial conditions have tightened and markets have been volatile," the Bank said.
According to Canada's central bank, more rate hikes will be needed, with market participants pricing in another 50 basis points increase in July. The Bank of Canada is not expected to pause until its key interest rate reaches around the 3% mark.
"As Canada's economy remains in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further," the Bank said.
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Bank of Canada Governor Tiff Macklem's team did not "mince" words in the June statement, said CIBC World Markets chief economist Avery Shenfeld.
"Its statement cited the likelihood of even higher inflation in the near term, and the broadening nature of price gains. Global growth indicators might be slowing, but Canada is described as 'strong' and expected to be 'solid' in the second quarter, leaving it in 'excess demand', the Bank's term for overheating," Shenfeld said in a note.
By early fall, there will be signs of growth deceleration in the Canadian economy, he added.
One day prior to the Bank of Canada's interest rate decision, the country's latest GDP data showed growth for the first quarter coming in short of expectations, with the GDP number at 3.1% versus the market consensus forecast of 5.2%.
"It [was] still an impressive performance given the headwinds presented by Omicron related restrictions and worker absenteeism early in the quarter. Moreover, the main negative to overall GDP came from net trade, with exports falling faster than imports during the quarter," noted CIBC World Markets senior economist Andrew Grantham.
Following the announcement, gold priced in Canadian dollars was largely unchanged but was able to retain its marginal early-morning gains, last trading at CAD$2,329.93 an ounce, up 0.26% on the day.
