July 27, 2023
Canada’s inflation rate has returned to the country’s target range after a tumultuous couple of years of soaring prices.
Statistics Canada reported on Tuesday that inflation fell to 2.8 per cent in June, down significantly from the eye-popping peak of 8.1 per cent reached last summer. That’s within the country’s one to three per cent inflation target and, as Finance Minister Chrystia Freeland has boasted, the lowest inflation rate in the G7.
But despite the good news, the Bank of Canada is still in inflation-fighting mode and seems more likely to raise interest rates further than cut them anytime soon.
Earlier this month, the central bank raised its key interest rate again by a quarter percentage point, bringing its key rate to five per cent. At the time, the most recent inflation reading showed the annual rate had fallen to 3.4 per cent in May. Though the decline in inflation was praised by governor Tiff Macklem, he also issued a warning that the central bank is ready to raise interest rates further if needed.
Given the progress made so far, the Bank of Canada’s hawkishness might seem confusing: why raise interest rates even more when inflation has fallen so significantly? After all, economists know there’s a lag in monetary policy, which means interest rate hikes can take between one to two years to fully affect the economy.
A key element of the answer lies in the Bank of Canada’s commitment to hit the midpoint of its target range. The central bank has been adamant that it’s aiming for two per cent inflation: not more and not less.
New projections from the Bank of Canada suggest the steady progress made on inflation over the last year will stall. The central bank now expects Canada’s inflation rate to hover around three per cent over the next year, before falling to two per cent by mid-2025. The Bank of Canada justified its last rate hike in part by pointing to this new projection, which also signals that interest rates are likely to stay higher for longer.
Private-sector economists also expect getting inflation back to two per cent will be challenging and will entail some hiccups along the way. That’s because core measures of inflation – which strip out volatility and are better at gauging underlying price pressures – are still high.
