Interest rates

Higher interest rates needed to rein in spending, Bank of Canada says

The first step to making life more affordable for Canadians is to reduce inflation, said the head of Canada’s central bank.

On Wednesday, Bank of Canada Governor Tiff Macklem addressed a Senate committee, which began a broad study of banking, commerce and the financial challenges facing Canadians, including inflation.

For the first time since 1991, inflation reached 4.8% in December.

The causes of high inflation, such as supply shortages, are temporary and will decrease to 3% by the end of this year, according to the bank.

The Bank of Canada is responsible for keeping inflation close to 2%, although ranges between 1 and 3% are acceptable. It does this by raising interest rates to curb inflation or by lowering rates to encourage spending and borrowing.

Inflation is expected to decline to the targeted 2% mark by 2023.

On January 26, the bank kept interest rates at 0.25%, but warned that increases to fight inflation were ahead.

READ MORE: Bank of Canada holds rates despite decades of high inflation

The increases will be partly tied to spending by Canadians and other economic developments, Macklem told the committee.

The bank is aware that rising prices for food, gasoline and other goods are impacting Canadians, he said.

“We are convinced that inflation will come down. The inflation we are seeing now reflects the very particular circumstances of this pandemic,” Macklem continued.

The bank’s next update is March 2 and economists expect interest rates to start rising in April.

The bank needs to raise interest rates to moderate demand growth so that it matches supply levels, Macklem said.

Statistics Canada’s report on gross domestic products by industry illustrates the growing demand for goods and services, he said.

Tuesday’s StatCan report revealed that in In November, almost all industries saw an increase from the previous month, including: 2.8% in wholesale trade; 1.4% in the manufacturing industry; 3.4% in accommodation and catering; and 0.3% in the public sector, according to the report.

Economic growth will depend on the severity of Omicron, but the bank expects it to grow 4% by the end of 2022 and 3.5% in 2023.

Canada’s central bank remains confident in its forecast due to indicators including that the U.S. economy is showing strength, said Carolyn Rogers, Macklem’s senior deputy governor.

“As our largest trading partner, (the United States) plays an important role in the growth we see for the Canadian economy,” she said.

Challenges affecting businesses and the economy, such as restrictions, will also begin to ease as the pandemic lifts, Rogers said.

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