Macklem explains policy after BoC hike decision

The Bank of Canada announced that it will raise the benchmark interest rate by 25 basis points to 5% in July, following its July policy meeting. This decision came in line with market expectations, as the Canadian economy has been stronger than expected and more momentum in demand.

The BoC noted that progress towards the 2% inflation target could stall, jeopardizing return to price stability. The Governing Council discussed keeping rates unchanged, but the cost of delaying action was larger than the benefit of waiting. With increases in policy rate in June and July, our outlook has inflation going gradually back to the 2% target.

The USD/CAD pair extended its slide with the initial reaction to the BoC policy announcements and was last seen trading deep in negative territory at around 1.3150. Key takeaways from the policy statement include CPI inflation forecasting to hover around 3% for the next year before gradually declining to 2% in mid-2025. Downward momentum in inflation has come more from lower energy prices, and less from easing underlying inflation.

Recent retail trade and other data suggest more persistent excess demand in the economy. The housing market has seen some pickup; new construction and real estate listings are lagging demand, adding pressure to prices. Consumption growth has been surprisingly strong at 5.8% in the first quarter.

The BoC expects economic growth to slow, averaging around 1% through H2 2023 and H1 2024. The bank is continuing its policy of quantitative tightening. Annualized Q1 GDP seen at 3.1% (vs 2.3% in April), Q2 1.5% (vs 1.0%), Q3 1.5%. Inflation to average 3.7% in 2023 (vs 3.5% in April), 2.5% in 2024 (vs 2.3%), 2.1% in 2025.