Canada Monetary Policy June 2022

Canada

Canada: Bank of Canada continues to raise rates in June

June 1, 2022

On 1 June, the Bank of Canada (BoC) raised its target for the overnight rate to 1.50% from 1.00%, marking the third consecutive rate hike this year. The Bank also said it was continuing its Quantitative Tightening (QT) policy by no longer reinvesting maturing government bonds.

The Bank’s decision was aimed at taming multi-decade high inflation. Moreover, the BoC judged there to be excess demand in the economy and highlighted the pick-up in wage growth and widespread labor shortages, providing further motivation for the hike.

Forward guidance grew more hawkish, with the Bank now stating that it was “prepared to act more forcefully if needed” in order to ensure inflation converges to the 2.0% target. Our panelists forecast well over 100 basis points of additional tightening by the end of the year.

On future rate hikes, analysts at ING remarked:

“Elevated inflation argue for another 'forceful' 50bp hike at the next meeting and probably the meeting after that. We certainly see greater upside for BoC rates than for the Fed funds rate in the U.S. with the Canadian economy experiencing an even hotter jobs market and property market than in the U.S. while the economy is additionally boosted by its strong commodity producing sectors. We see the Bank of Canada hiking rates to 3.5% in early 2023.”

Analysts at Desjardins see even more aggressive near-term tightening:

“The Bank of Canada needs to get a handle on prices soon. The acceleration in inflation will likely force the Bank of Canada to raise rates a further 75bps, a jumbo-sized move central bankers should have made earlier this month.”

The BoC’s next policy announcement will be on 13 July.

Our panelists project the target for the overnight rate to end 2022 at 2.30% and 2023 at 2.46%.


Author:, Economist

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Canada Monetary Policy Chart


Canada Monetary Policy June 2022 0

Note: Target for the Overnight Rate in %.
Source: Bank of Canada (BoC).


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