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Special Report

Canada Monetary Policy
Research Brief

December 2022

Bank of Canada Softens Language;
Monetary Tightening May Be At or Nearing Its End

Central bank outlook turns dovish. The Bank of Canada raised its overnight rate by 50 basis points in December, bringing it to 4.25 per cent. While inflation has softened, annual price growth remains well above the target of 2.0 per cent. GDP growth also beat expectations in the third quarter, signaling that the economy continued to operate with excess demand. Nonetheless, in its announcement, the BoC stated that there is evidence of tighter monetary policy restraining domestic demand, as consumption has eased and home sales are retreating. The three-month rates of change in core inflation have also dropped, which is an early indicator that price pressures may be losing momentum. Correspondingly, the BoC transitioned to more dovish language, contemplating whether additional policy rate hikes are needed to bring supply and demand back into balance. This differs from previous announcements, where it firmly stated that the rate will need to rise further. While one additional 25-basis-point hike remains a possibility in January amid a still-tight labour market, the Bank may be at the end of its monetary tightening cycle.

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