July 12 (UPI) — Robust demand and a tight labor market suggests the Canadian economy is still overheating, warranting an increase of 25 basis points to the bank rate, the Bank of Canada said Wednesday.
“Global inflation is easing, with lower energy prices and a decline in goods price inflation,” the bank said. “However, robust demand and tight labor markets are causing persistent inflationary pressures in services.”
In the labor market, the bank said there are signs of easing, but wages are on the rise. Inflation to May, meanwhile, slowed from the summer 2022 peak of 8.1% to 3.4% on a 12-month basis.
“But even as headline inflation has come down largely as we forecast, underlying inflationary pressures are proving more persistent than we expected,” Bank of Canada Gov. Tiff Macklem said. “Higher interest rates are needed to slow the growth of demand in the economy and relieve price pressures.”
The Bank of Canada had not raised its lending rate for five months until June, when it surprised the market with an increase of 25 basis points after policymakers said supply and demand still were out of balance.
Consumer-level inflation jumped to 4.4% in April, the first increase in 10 months. Macklem said Wednesday that growth has been surprisingly strong for much of the year and consumer spending is robust.
“And while spending on many goods that are typically sensitive to interest rates has slowed, it has not slowed by as much as we expected,” he said. “The housing market has also seen some pickup in activity.”
Looking globally, the bank said trends were similar in major economies such as China and the United States. U.S. inflation eased to June, though the Bank of Canada commented that “consumer and business spending has been surprisingly resilient” for its southern neighbor.
