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Interest rates and a hot economy


With the Canadian economy showing strong signs of recovery the way is clear for another half-a-percentage point increase in the Bank of Canada rate.


Statistics Canada figures for February show that gross domestic product (GDP) grew by another 1.1%, with just about all sectors of the economy showing improvement.


Preliminary data for March indicate a further 0.5% increase. First quarter GDP growth is expected to hit 5.6%, which is nearly double the official forecast.


This rapid rebound from the Omicron variant of COVID-19 now has the Bank of Canada warning that the economy is overheating and more interest rate increases will be needed to cool it down and slow the pace of inflation. That has cemented expectations for, at least, a 50 basis point increase in the Bank’s Policy Rate at the next setting on June 1st. There is also the possibility of a 75 basis point hike.


In testimony before the Senate Banking Committee last week Bank of Canada Governor, Tiff Macklem, warned that the central bank may have to push its Policy Rate beyond the neutral range.


"It's possible that we may have to go above the neutral rate for a period of time to return inflation to target, but it's a bit above 2% or 3%, it's not 7% or 8%," he said.


"It's going to be delicate. "But we do need to raise interest rates to moderate that spending growth and get inflation back to target," Macklem said.

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