OTTAWA, July 12 (Reuters)-The Bank of Canada (BoC) on Wednesday raised its growth forecast for this year to 1.8%, up from the 1.4% predicted in April, as excess demand continues feed underlying inflation, which is coming down more slowly than had been previously estimated.
In its quarterly Monetary Policy Report, the BoC said inflation would descend to the central bank's 2% target only in mid-2025, six months later than had been forecast in April.
The central bank also hiked its forecasts for quarterly growth. The economy is seen expanding 1.5% in the second quarter from the previous one on an annualized basis, up from 1% in April, and gaining 1.5% in the third quarter.
"The rebalancing of supply and demand is now expected to happen in early 2024, three quarters later than previously anticipated," the report said.
Driving growth is a tighter-than-expected labor market, greater pent-up demand for services, a stronger outlook for housing prices, and provincial and federal fiscal measures, the central bank said.
The BoC hiked rates to a 22-year high of 5.00% on Wednesday, citing concerns that inflation would stall above its 2% target.
"CPI inflation is forecast to be higher by as much as 0.4 percentage points in the first half of 2024," the report said. "Core inflation is also projected to be higher - by as much as 0.5 percentage points in the first quarter of 2024."
Potential output growth in Canada is expected to increase to about 2% per year over the projection horizon from 1.4% in 2022, and the nominal neutral interest rate is seen to be in the range between 2% and 3%, unchanged from previously.