Canada Monetary Policy
Bank of Canada Returns from the Sidelines and
Raises Policy Rate by 25 Basis Points
Conditional pause comes to an end. After two consecutive pauses, the Bank of Canada increased its policy rate 25 basis points in June, bringing it to 4.75 per cent. While a rate hike was a possibility, this was not the consensus among economists. However, this increase is not a complete surprise as it comes after a slight uptick in April inflation, along with stronger-than-expected first quarter GDP growth and a resilient labour market. The BoC also cited robust consumer spending, as well as a rebound in the housing market, as further reasons to increase its overnight rate as monetary policy was not sufficiently restrictive to bring supply and demand back into balance. Excess demand in the economy looks to be more persistent than anticipated, with the three-month measures of core inflation running in the 3.5 to 4.0 per cent range. Consequently, there is a growing risk that inflation could get stuck materially above the 2 per cent target, which increases the likelihood of a further rate hike.