OTTAWA -- The Bank of Canada will likely need to keep interest rates at or above 4 per cent 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 per cent 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 per cent in June and end 2023 at about 4.10 per cent.
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 per cent target.
The IMF said inflation should continue declining and return to the 2 per cent target by end-2024, while economic growth was set to slow to 3.3 per cent in 2022 and 1.5 per cent next year.
Slowing growth should also push unemployment to rise moderately and reach the pre-pandemic level of around 6 per cent 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 per cent in 2023 and inflation returning to 2 per cent in 2024.
"Important risks, however, surround the baseline forecast, and shocks could easily push the economy into a mild recession," the IMF said.
(Reporting by Ismail Shakil in Ottawa; Editing by Mark Potter)
