Bank of Canada Raises Rates to 5%, Sees Inflation Lingering

financialpost.com:

(Bloomberg) — The Bank of Canada raised interest rates for a second straight meeting, pushing back the timeline for inflation’s return to target while revising growth upward.

Policymakers led by Governor Tiff Macklem increased the overnight lending rate on Wednesday by 25 basis points to 5%, the highest in 22 years. The move was expected by most economists in a Bloomberg survey, and markets had put the odds at around three quarters.

The loonie jumped to its highest intraday level since June 27, trading at C$1.3157 per US dollar at 10:33 a.m. Ottawa time. The benchmark two-year yield, which had plunged earlier after US inflation came in at a lower rate than expected, fell further to 4.675%.

The bank provided little guidance on the future path of borrowing costs in the rate statement, but reiterated that it “remains resolute” in its commitment to achieving price stability.

In the accompanying monetary policy report, officials forecast inflation will stay around 3% for the next year before gradually declining to the 2% target in mid-2025, two quarters later than previous projections. The economy is seen averaging about 1% growth in the second half of this year and first half of 2024, an upward shift from the stall expected earlier. The bank now predicts the output gap will close nine months later than previously anticipated, early next year.

The substantial forecast adjustments illustrate why policymakers restarted their tightening campaign in June. The central bank’s attempt to pause interest rates earlier this year proved untenable in the face of stubborn price pressures and surprisingly robust consumption growth.

But delaying the return to price stability suggests the bank is struggling with its primary job, even as