The Bank of Canada has lowered its forecast for gross domestic product (GDP) this year to
3.50% from 4.25% previously as the economy begins to slow in the wake of higher interest
rates.
The central bank also lowered its forecast for GDP growth in 2023 to 1.75% from 3.25%. The
diminished forecasts were issued as the Bank of Canada raised interest rates by a full
percentage point, lifting its benchmark overnight interest rate to 2.50%.
In addition to higher interest rates, the Bank of Canada said that the Canadian economy is
being negatively impacted by an ongoing surge in commodity prices and rising housing costs.
Regarding inflation, the Bank of Canada said it expects consumer prices to be “substantially
higher than projected” by year’s end. The central bank now says that inflation in Canada should
be at 7.2% at the end of this year, an outlook that is two percentage points higher than its
previous forecast.
The central bank added that inflation is likely to sit at 4.60% in 2023 before dropping closer to its
2% target in 2024. Specifically, the Bank of Canada sees inflation at 2.30% two years from now.
In its quarterly Monetary Policy Report, the Bank of Canada acknowledged that it failed to
accurately predict inflation’s rise since 2021. The central bank blamed its missed inflation
projections on higher commodity prices, increased supply shortages, and elevated shipping
costs.
Canada’s faster-than-expected economic recovery from the global pandemic and hot housing
market were also cited as having big impacts on inflation over the past 18 months.