The Bank of Canada rate decision left the policy rate unchanged at 2.25% on Wednesday, with the Bank Rate at 2.5% and the deposit rate at 2.20%. The central bank said higher energy prices, supply chain strain and trade policy uncertainty are lifting inflation and weighing on growth. However, it said Canada’s economy remains weak and still faces excess supply.
Canadian financial conditions have eased since the April Monetary Policy Report. Meanwhile, global stock markets have stayed firm and bond yields have remained volatile. The Bank also said the Canadian dollar has weakened against the US dollar and other currencies.
Bank of Canada Rate Decision and Inflation
In Canada, gross domestic product slipped 0.1% in the first quarter, below what the Bank expected in April. Consumer spending rose 1.4%, but government spending fell unexpectedly. Housing activity declined, business investment stayed weak, exports dropped and imports rose strongly as inventories were rebuilt.
Employment increased in May, although the Bank said monthly job data has been volatile. Looking past that volatility, it said employment has changed little since the start of the year. The unemployment rate was 6.6% in May and has been moving in a 6.5% to 7% range.
The Bank said recent data points to growth returning in the second quarter. Even so, it expects the economy to remain in excess supply. Therefore, policymakers said they must balance weak activity against the risk of firmer inflation.
Energy Prices Shape the Outlook
Consumer price inflation rose to 2.8% in April, as expected, the Bank said. It linked that increase to higher oil prices and to the effect of the consumer carbon tax elimination dropping out of the 12-month inflation rate. So far, officials said they have seen limited signs that higher energy costs are spreading broadly to other consumer prices.
Measures of core inflation have eased to around 2%, while the share of CPI components rising above 3% is near its historical average. Food price inflation slowed but remained high, and shelter inflation continued to ease. Meanwhile, oil prices are still about $10 a barrel above the Bank’s April assumptions.
The Bank said total inflation is likely to stay around 3% in the near term before gradually moving back toward 2%. Governing Council said it will look through the war’s near-term effect on headline inflation. However, it added that it will not allow higher energy prices to become persistent inflation and stands ready to respond as needed.
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