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Bank of Canada increases key rate

The Bank of Canada today increased its target for the overnight rate to ½ %. A report from the bank said the unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply.

The higher rate will likely prompt Canada’s big banks to raise their prime lending rates, a move that will increase the cost of loans such as variable-rate mortgages that are linked to the benchmark.

The banks said economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. CPI inflation is currently at 5.1%, as expected in January, and remains well above the Bank’s target range

The Bank expected this will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased. The situation remains fluid and we are following events closely.

The report explained that global economic data has come in broadly in line with projections in the Bank’s January Monetary Policy Report (MPR).

It continued,” Economies are emerging from the impact of the Omicron variant of COVID-19 more quickly than expected, although the virus continues to circulate and the possibility of new variants remains a concern. Demand is robust, particularly in the United States. Global supply bottlenecks remain challenging, although there are indications that some constraints have eased.”

The report said “This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed. Both exports and imports have picked up, consistent with solid global demand. In January, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.”

The report also noted that economic growth in Canada was very strong in the fourth quarter of last year at 6.7%. CPI inflation is currently at 5.1%, as expected in January, and remains well above the Bank’s target range. Price increases have become more pervasive, and measures of core inflation have all risen. Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities. All told, inflation is now expected to be higher in the near term than projected in January. Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards. The Bank will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.
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