As was widely expected, the Bank of Canada raised its overnight policy rate by 0.75 basis points, bringing it to 3.25 per cent. In the statement accompanying the decision, the Bank noted that while CPI inflation eased somewhat in July, that easing was due only to a fall in gasoline prices and more broad-based measures of price growth like core inflation moved slightly higher. The Bank continues to see excess demand in the Canadian economy, but does anticipate a moderation in the second half of the year. Ultimately, the Bank sees a need for the policy rate to rise further and will be assessing how much higher interest rates need to go to bring inflation back to its 2 per cent target.
The overnight rate is now above the Bank's estimate of "neutral", or the level of its policy rate at which inflation should run at 2 per cent and the economy is operating at full-capacity. How much further the Bank will go and how long rates will stay above neutral depends entirely on the trajectory of inflation going forward. We expect the Bank will its policy rate at least one more time this year, ultimately settling at 3.5 or 3.75 per cent.
For more information, please contact: Gino Pezzani.