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(Kitco News) The Bank of Canada raised its key interest by another 25 basis points to 5% after resuming its rate hikes in June. This is the highest level since 2001. Gold priced in Canadian dollars pared its daily gains.
This is the second consecutive month hike, with the Bank of Canada citing persistent inflation in the service sector as the reason for more tightening. And that is despite Canada’s annual inflation easing to 3.4% in May.
“While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from easing underlying inflation,” the Bank of Canada’s press release said.
Bank of Canada Governor Tiff Macklem said that given the current macro environment, the monetary policy rate was not restrictive enough and did not rule out more increases in the future.
"We are concerned that the progress to price stability could stall and inflation could even rise again,” Mackles told reporters Wednesday. “If there are upside surprises, as I said, we are trying to balance the risks of over and under tightening. If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don't want to do any more than we have to."
Inflation is not expected to return to 2% until mid-2025, the Bank added, noting that it remains concerned that progress could stall and jeopardize the return to price stability.
"In the July MPR projection, CPI inflation is forecast to hover around 3% for the next year before gradually declining to 2% in the middle of 2025,” the central bank said. “This is a slower return to target than was forecast in the January and April projections.”
In its latest economic projections, the central bank forecasts for growth to slow and average around 1% through the second half of this year and the first half of next year.
“This implies real GDP growth of 1.8% in 2023 and 1.2% in 2024. The economy will move into modest excess supply early next year before growth picks up to 2.4% in 2025,” the press release said.
The Bank also noted that growth in the U.S. has been especially stronger than expected, projecting the global economy to grow by around 2.8% this year, 2.4% in 2024, and by 2.7% in 2025, according to the July Monetary Policy Report (MPR).
Following the announcement, gold priced in Canadian dollars pared its daily gains, last trading at $2,572.80, up 0.64% on the day.
