Bank of Canada raises rates despite falling inflation

The Bank of Canada raised its policy rates 25 basis points on July 12, taking the deposit rate to 5%.

“We’re taking it one decision at a time,” said BoC Governor Tiff Macklem. “We’re doing our best to balance the risks of over and under tightening.” The seven-member governing council’s decision leaves the overnight rate at 5%, and the bank rate at 5.25%.

“If we’re not careful the progress to price stability could stall,” warned Macklem. “It’s clearly too early to be talking about interest rate cuts.”

The BoC raised rates despite year-on-year headline inflation falling to 3.4% in May, its lowest level since June 2021. It warned that underlying inflationary pressures had not gone away.

The central bank now predicts inflation will return to its 2% target in mid 2025, slower than it forecast in January and April. It said the governing council “remains concerned that progress towards the 2% target could stall, jeopardizing the return to price stability.”

Persistent excess demand, surprisingly high housing prices, and higher-than-expected tradable goods prices, the central bank said, all caused it to revise its forecasts. The BoC said the large drop in inflation since last summer has come primarily from falling energy prices, not easing underlying inflationary drivers.

“Underlying price pressures appear to be more persistent than anticipated,” it said. “This is reinforced by the Bank’s business surveys, which find businesses are still increasing their prices more frequently than normal.”

The bank said it will continue to unwind its balance sheet in quantitative tightening. It said it “expects economic growth to slow, averaging around 1% through the second half of this year and the first half of next year” in Canada.

A global economic slowdown was a major downside economic risks the central bank projected. “It is,” said the bank, “possible that higher policy rates could interact with long-standing global financial vulnerabilities, such as elevated levels of debt, to significantly slow global growth.”