Ottawa October 26 2022: The Bank of Canada announced a smaller-than-expected interest rate hike on Wednesday and made clear more increases were still needed, even as it forecast that the economy could soon slip into a slight recession.
The central bank increased its policy rate by half a percentage point to 3.75%, a 14-year high but coming up short on calls for another 75 basis points move. It has lifted rates by 350 basis points since March, one of its fastest tightening cycles ever.
The bank separately said growth would stall later this year and early next year, edging down its 2022 economic outlook to 3.3% from 3.5% forecast in July, and slashing 2023 growth to 0.9%, from 1.8%.
"This suggests that a couple of quarters with growth slightly below zero is just as likely as a couple of quarters with small positive growth," the bank said in its October Monetary Policy Report.
A technical recession, two consecutive quarters of negative growth, is possible between the fourth quarter of 2022 and the end of the second quarter of 2023, the forecasts show.
Despite the darkening outlook, elevated inflation and inflation expectations, along with ongoing demand pressures meant the policy rate would need to go higher, the bank said.
"Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding," it said.
Inflation has slowed to 6.9% in September from a peak of 8.1% in June, but core measures remain broad-based and persistent. The central bank revised downward its inflation outlook on lower commodity prices and easing supply chain disruptions.
"Inflation is expected to return to the top of the 1%-3% control range by the end of 2023 and to the 2% target by the end of 2024," the bank said.
After the decision, the Canadian dollar weakened to 1.3625 against the Greenback, or 73.39 U.S cents.
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