The Bank of Canada raised its key interest rate Wednesday for the sixth time since March. The overnight rate now stands at 3.75 per cent, an increase of 50 basis points.
In announcing the latest rate increase on Wednesday, Bank of Canada governor Tiff Macklem said he expects the policy rate will increase even further.
“How much further will depend on how monetary policies are working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding to this tightening cycle,” Macklem said.
The decision for the October increase stems from inflation in Canada remaining high and broad-based, said Macklem.
Despite inflation falling from 8.1 per cent to 6.9 per cent between June and September, he said we have yet to see a generalized decline in price pressure.
“Households and businesses want to buy more goods and services than the economy can produce, and this is driving prices up,” he said.
Macklem also noted that the economy is “overheated” and remains in excess demand at this time. However, Macklem said higher interest rates are beginning to have an impact on growth.
“This is increasingly evident in interest rate sensitive parts of the economy like housing and spending on big-ticket items, but the effects of higher interest rates will take time to spread through the economy,” continued Macklem.
Finally, Macklem brought up that there are no “easy outs” to restoring price stability. He said we need the economy to slow to rebalance demand and supply and relieve price pressures.
“We expect growth will stall in the next few quarters, in other words, growth close to zero,” he said.
However, once Canada gets through the slowdown, Macklem said growth and the economy will begin to pick up.
“The benefits of low and predictable inflation will be restored,” he said.
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