Bank of Canada raises policy rate by 25 basis points

Ottawa, July 13 The Bank of Canada has increased its benchmark interest rate by 25 basis points to 5 per cent.

In light of the accumulation of evidence that excess demand and elevated core inflation are both proving more persistent, and taking into account its revised outlook for economic activity and inflation, the bank's governing council decided to increase the policy interest rate, Xinhua news agency quoted the central bank as saying in a statement.

According to the bank, as higher interest rates continue to work their way through the economy, Canada's economic growth will average around 1 per cent through the second half of this year and the first half of next year.

This implies real GDP growth of 1.8 per cent in 2023 and 1.2 per cent in 2024.

The economy will move into modest excess supply early next year before growth picks up to 2.4 per cent in 2025, the bank said.

While CPI inflation has come down largely as expected so far this year, it is forecast to hover around 3 per cent for the next year before gradually declining to 2 per cent in the middle of 2025.

This is a slower return to target than was forecast in the January and April projections, the bank said.

The governing council remains concerned that progress towards the 2 per cent target could stall, jeopardising the return to price stability, the bank added.

The governing council will continue to be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the 2 per cent inflation target, the Bank of Canada said.