The Bank of Canada says it expects inflation to be higher than it initially thought and has suggested that an interest rate hike may come sooner than expected.
For now, Canada’s central bank has kept its key rate at 0.25%. He also ended his stimulus package called quantitative easing (QE). Quantitative Easing enters a reinvestment phase, during which Government of Canada bonds will only be purchased to replace maturing bonds.
The Bank of Canada says inflation appears to be less temporary than it originally thought.
“The main forces driving prices up – higher energy prices and pandemic bottlenecks – now appear to be stronger and more persistent than expected,” the Bank of Canada said in a statement. .
“Basic measures of inflation have also increased, but less than the CPI. The Bank now expects CPI inflation to be high over the next year and fall back to around the 2% target by the end of 2022. “
The Bank of Canada has also changed its mind about the upcoming interest rate hike. Although he says monetary policy support is still needed, he has raised his projection for the next interest rate hike.
“We remain committed to keeping the key interest rate at the effective lower limit until the economic downturn is absorbed so that the 2% inflation target can be reached on a sustainable basis. In the Bank’s projection, this will occur in the interim quarters of 2022, ”the Bank of Canada said.
In its previous interest rate announcement, the Bank of Canada predicted this would happen in the second half of 2022.
The forecast for real GDP growth was lowered by one percentage point to 5.1% in 2021, and from 0.3% in 20022 to 4.3% in 2022.
“Overall, much more hawkish than expected (although not more hawkish than the market has predicted), and in our view, too pessimistic about the magnitude of supply shocks that will limit future potential GDP. , and a little optimistic in its growth forecast, which could delay the timing of the first hike from what is reported here, ”said CIBC chief economist Avery Shenfeld.
Loonie and bond yields surged within minutes of the announcement.
Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on twitter @jessysbains.
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