By Surbhi Gogia
The news of the recent interest rate hike by the Bank of Canada, hit hard on every Canadian especially those with home mortgages. It has left many wondering if this was the last hike or will the rates go higher in the coming months.
The answer was hidden in Bank of Canada’s Governor Tiff Macklem’s statement when he revealed that the Bank raised policy interest rate by 25 basis points to 5% on July 25.
He said that inflation needs to come down to 2%. And the Bank will continue to raise rates or “that monetary policy needed to be more restrictive to bring inflation back to the 2% target.”
And according to the Bank’s forecast, inflation will still be around 3% next year.
He informed that the Consumer price index (CPI) inflation has fallen. CPI measures the cost of a fixed basket of goods and services.
The goods and services in the CPI basket are divided into 8 major components: Food; Shelter; Household operations, furnishings and equipment; Clothing and footwear; Transportation; Health and personal care; Recreation, education and reading, and Alcoholic beverages, tobacco products and recreational cannabis.
According to the Bank, CPI inflation has fallen from a peak of 8.1% last summer to 3.4% in May. “But even as headline inflation has come down largely as we forecast, underlying inflationary pressures are proving more persistent than we expected. Higher interest rates are needed to slow the growth of demand in the economy and relieve price pressures,” Macklem said.
The reasons for underlying inflation are people still spending a lot on services, the housing market witnessing some pickup in activity, and increasing population growth. “Rapid population growth is contributing to both supply and demand in the economy. Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing,” he said.
But several things need to happen for inflation to slow down to 2%. And the Bank is particularly concerned about two upside risks.
“First, we have been surprised by the persistence of excess demand and underlying inflation in Canada and globally. We know that higher rates are having an impact, but how big their impact will be is uncertain. Second, with the downward momentum in inflation waning and our forecast suggesting inflation will be around 3% for the next year, we are concerned that the progress to price stability could stall, and inflation could even rise again if there are upside surprises,” Macklem said.
Elevated inflation is a burden on Canadians, especially for the most vulnerable. He said that the Bank is acutely aware that higher rates are making life more difficult for many Canadians. “And we know many Canadians are asking: Is the Bank done raising interest rates, or will rates need to go higher still to relieve price pressures? The short answer is we will be taking each decision based on the information available at the time.”
“These decisions will be guided by our assessment of incoming data and the outlook for inflation. We need to see demand growth slow, wage pressures moderate and corporate pricing behaviour normalize. We will also need to see near-term inflation expectations and measures of core inflation come down further.
The substantial drop in inflation over the past year is welcome news for all Canadians. But monetary policy still has work to do—our job is not done until inflation is centred on our 2% target. That is the level that helps the economy grow sustainably, restores competitive forces in the economy and gives Canadians the price stability they need to budget and invest with confidence.
