Bank of Canada will likely require rates to be held at or above 4% by 2023. IMF

Bank of Canada

The Bank of Canada will likely have to maintain interest rates at or higher than 4 percent for the majority of 2023 to cool an overheated economy and control high inflation, as The International Monetary Fund (IMF) stated in a recent report.

Bank of Canada
The Bank of Canada in Ottawa, Photographer: Justin Tang/Bloomberg via Getty Images

The benchmark overnight interest rate has a 15-year record high of 4.25 percent, following an increase of 50 basis points announced last Wednesday.

In its annual assessment of the economy of Canada, released late Thursday, the IMF stated that “the primary priority for the moment is to reduce inflation without creating a recession” and praised Canada’s Bank’s “decisive decision to tighten its policy.”

The central bank has increased rates at an unprecedented rate by 400 basis points within nine months to combat inflation well beyond its targets. The market expects the policy rate to peak at 4.36% in June and closes 2023 with 4.10 percent.

Inflation is slowly easing after hitting the highest level in four decades in June. However, it is still three times higher than the central bank’s target of 2.

The IMF stated that inflation would continue falling and eventually return to the goal of 2% by 2024. Economic growth was expected to slow down to 3.3 percent in 2022, 1.5 in 2023, and 1.5 % the following year.

A slowing in growth will cause the unemployment rate to go up, but it is likely to be moderate and eventually reach pre-pandemic levels of 6 percent by the following year, IMF added.

The projections agree with the Bank of Canadian’s prediction of the growth rate reducing to less than 1 percent by 2023 and inflation rising to 2% by 2024.

“Important dangers, however, concern the forecast for the baseline, and shocks could quickly push economic growth into moderate economic recession,” according to the IMF.

Read more: US Economy: Long Covid-19 has been causing distortions in the labor market and this is bad for the US economy

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