The Bank of Canada will likely need to keep interest rates at or above 4% for most of 2023 to cool an overheated economy and tame high inflation, the International Monetary Fund (IMF) said in a report.
The central bank’s benchmark overnight interest rate currently stands at a nearly 15-year high of 4.25% after a 50 basis point hike announced on Wednesday.
The IMF, in its annual review of Canada’s economy released late Thursday, said “the key immediate priority is to bring inflation down without triggering a recession,” and that it welcomed the Bank of Canada’s “decisive policy tightening.”
The bank has raised rates at a record pace of 400 basis points in nine months to fight inflation that is far above its target. Money markets expect the policy rate to peak at 4.36% in June and end 2023 at about 4.10%.
Inflation has been edging down after surging to a four-decade high in June, but is still more than three times the central bank’s 2% target.
The IMF said inflation should continue declining and return to the 2% target by end-2024, while economic growth was set to slow to 3.3% in 2022 and 1.5% next year.
Slowing growth should also push unemployment to rise moderately and reach the pre-pandemic level of around 6% by next year, IMF added.
The projections are largely in line with the Bank of Canada’s forecast of growth declining to just under 1% in 2023 and inflation returning to 2% in 2024.
“Important risks, however, surround the baseline forecast, and shocks could easily push the economy into a mild recession,” the IMF said.