Bank of Canada Increases Policy Interest Rate By 75 Bps, Continues Quantitative Tightening

• On September 7^th the Bank of Canada increased its target for the overnight rate to 3.25%, with the Bank Rate at 3.50% and the deposit rate at 3.25%. The Bank is also continuing its policy of quantitative tightening.
• The global and Canadian economies are evolving broadly in line with the Bank’s July projection. The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.
• The Canadian economy also continues to operate in excess demand and labour markets remain tight. Canada’s GDP grew by 3.3% in the second quarter. While this was somewhat weaker than the Bank had projected, indicators of domestic demand were very strong – consumption grew by about 9.5% and business investment was up by close to 12%. With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic.
• Considering the aforementioned, the Bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy in Canada begins to bring demand more in line with supply.
• Given the inflation outlook, the Governing Council still judges that the policy interest rate will need to rise further. It is using quantitative tightening to complement increases in the policy rate. As the effects of tighter monetary policy work through the economy, it will be assessing how much higher interest rates need to go to return inflation to target.

(Source: Bank of Canada)