After stronger-than-expected Q1 GDP growth and April inflation surprise, is central bank hiking again?
After two sessions of holding interest rates steady, the Bank of Canada is pulling back from its wait-and-see monetary policy stance.
In its rate decision today, the central bank revealed it is hiking its key interest rate by a quarter-percentage point, bringing it to 4.75%.
“Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high,” the BoC said this morning. “While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability.”
BoC Governor Tiff Macklem first announced the central bank’s conditional pause on its rate-hiking campaign in January as inflation seemed to be simmering down from a 40-year record boil. At the time, CPI had been on a continuing decline from its summer 2022 zenith of 8.9%.
From there, headline inflation maintained its downward path to 4.3% in March. But the slight acceleration of CPI to 4.4% in April – coupled with continued tightness in the job markets – prompted musings that the central bank might want to tap the brakes again.
Those concerns were amplified last week when Statistics Canada reported the country’s economy had grown 3.1% on an annualized basis in the first quarter, exceeding the 2.5% the agency had projected previously. A pulse estimate by StatCan also indicated the economy expanded by 0.2% in April.
“Based on the accumulation of evidence, Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target,” the central bank acknowledged today.
The BoC also noted the role of quantitative tightening in normalizing its balance sheet, while complementing its restrictive monetary policy posture.
“Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation,” it said, highlighting “the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour” as points of focus.
“The Bank remains resolute in its commitment to restoring price stability for Canadians.”
