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Overnight Rate Experiences 25 Basis Point Hike as Bank of Canada Maintains Quantitative Tightening

The Bank of Canada made an announcement this week, adjusting its target for the overnight rate to 4¾%. The Bank Rate now stands at 5%, and the deposit rate mirrors the overnight rate at 4¾%. This move comes alongside a continuation of its policy on quantitative tightening.

Internationally, consumer price inflation is showing a downward trend, primarily due to lower energy prices in comparison to the previous year. However, base inflation remains persistently high. Amidst the backdrop of increased interest rates impacting global economic growth, major central banks hint that further elevation in interest rates might be necessary to restore price stability.

In the United States, the economy shows signs of deceleration, but consumer spending surprisingly remains robust and the labour market tight. Europe’s economic growth seems to have hit a plateau, but upward pressure on core prices continues. After an impressive performance in the first quarter, China’s growth rate is predicted to moderate. Financial conditions resemble those witnessed prior to the bank collapses in the U.S. and Switzerland.

The Canadian economy outperformed expectations in the first quarter of 2023, posting a GDP growth rate of 3.1%. Consumption growth was robust and widely distributed, even after accounting for population growth. A bounce-back in demand for services was observed, and expenditure on interest-sensitive goods saw an upswing. The labour market remains taut; increased immigration and participation rates are contributing to an expanded workforce, but new entrants are rapidly finding employment due to the persisting high demand for labour. As a result, excess demand seems more tenacious than initially forecasted.

Inflation, measured by the Consumer Price Index (CPI), increased to 4.4% in April, a notable uptick and the first in almost a year. Despite decreased energy costs, inflation of goods’ prices rose, while the inflation of service prices remained high due to strong demand and a strained labour market. The Bank anticipates CPI inflation to recede to approximately 3% during the summer as the impact of lower energy prices takes effect, and last year’s significant price hikes are excluded from annual data. However, with core inflation consistently within the 3½-4% range for the past few months and the persistence of excess demand, fears of CPI inflation remaining substantially above the 2% target are mounting.

Following an analysis of gathered evidence, the Governing Council decided to raise the policy interest rate. This reflects their assessment that monetary policy was not restrictive enough to restore balance between supply and demand and to bring inflation back to the 2% target sustainably. Quantitative tightening supplements the restrictive stance of monetary policy and aids in the normalization of the Bank’s balance sheet. The Governing Council will continue to monitor the core inflation dynamics and the CPI inflation outlook, evaluating if the interplay of excess demand, inflation expectations, wage growth, and corporate pricing behaviour align with the inflation target. The Bank reiterates its unwavering commitment to reinstating price stability for Canadians.

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Melissa has 8+ years of combined Commercial, Business and Contract Law experience as In-House Counsel in manufacturing, health, real estate development, and broadcast communication industries. She is instrumental in developing strategies to minimize legal risk and ensure regulatory compliance.

She has 6+ years of Human Resources Management experience and a Chartered Professional in Human Resources (CPHR) designation. Her practice includes Family Law, Civil Litigation, Wills & Estates and Real Estate & Conveyancing.

For fun, she visits ancient sites and ruins and belts out popular Broadway tunes.

northam law corporation

Northam Law is a boutique law firm offering advisory services in Real Estate Law and Conveyancing, Business Law, and Human Resources. Our practice areas also include Wills & Estates and Family Law. Notarization services are also available.

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