Bank of Canada to raise interest rates to 4.5% by 2023, says OECD

So far in 2022, the Bank of Canada has hiked the key interest rate a total of five times, with the latest increase in early September pushing the rate up 0.75% to 2.5% at 3.25%.

Economists generally agree that more hikes will follow before the end of 2022, but a new report from the Organization for Economic Co-operation and Development (OECD) predicts that the Bank of Canada will raise its rate to 4.5 % by 2023 — higher than the expectation for an absolute 4% cap in the current bull cycle. This would represent at least another 0.75% increase over the next few months.

The OECD warns that such a hike is necessary to further control runaway inflation, including reducing economic demand to really curb rising labor costs due to the immense labor shortage. work.

“Interest rates have been raised sharply by most major central banks in recent months as policy choices become increasingly dependent on current developments. In a number of countries, including the United States, financial conditions are also tightening due to continued central bank balance sheet reductions,” the forecast reads.

“Widening pricing pressures across the economy have led to stronger policy rate hikes than earlier forecasts suggested to minimize risks of high inflation becoming entrenched in expectations. inflation and affects wage growth in historically tight labor markets. Delaying action would have increased the risk that even stronger measures would ultimately be needed to bring inflation down.

At the same time, the OECD also warns that the sharp rise in rates will likely imply a period of “below-trend growth” in the economy.

High inflation is still in the forecast for Canada. After an inflation rate of 6.9% in 2022, it will drop to 4.5% in 2023. Comparatively, the United States will experience an inflation rate of 6.2% in 2022, down from nearly half to 3.4% in 2023.

The OECD forecasts that Canada’s real GDP growth will decline from 3.4% in 2022 to 1.5% in 2023, which is below the world average of 2.2% next year. But the growth of the Canadian economy will be higher than that of the United States, with growth of 1.5% in 2022 and 0.5% in 2023.

By 2023, key interest rates are expected to rise from 4.5% to 4.75% in the United States, 4.25% in the United Kingdom and 3.6% in Australia.

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