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Canada Central Bank Hikes Key Interest Rate From 1.5% to 2.5%

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Canada’s central bank on Wednesday raised its key lending rate by a whopping 100 basis points — four times the usual increase — to 2.5 percent in order to fight skyrocketing inflation. online news

The Bank of Canada said inflation has been “higher and more persistent” than expected, and price increases are broadening amid a robust economy in which demand has far outstripped supply.

To try to stem that trend, it said it “decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today,” while warning of more rate hikes to come.

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Analysts had widely expected an increase of 75 basis point following several incremental and modest increases from a near record low.

The actual hike was the largest since 1998, and brings the bank’s overnight lending rate to its highest level since 2008.

It was a “colossal move,” commented Desjardins analyst Royce Mendes in a research note.

The Bank of Canada forecast that inflation would “likely remain around eight percent in the next few months” before easing to about three percent by the end of next year and returning to its two percent target by the end of 2024.

It cited the war in Ukraine and supply disruptions as the biggest drivers, but noted that “domestic price pressures from excess demand are becoming more prominent.”

Unemployment is also at a record low and labour shortages are widespread, increasing wage pressures. Businesses are passing on higher input and labour costs by raising prices.

The bank said it expects economic growth to slow in the third quarter as consumption dips and a red hot housing market cools off, closing the year at 3.5 percent, followed by 1.75 percent in 2023 and 2.5 percent in 2024.


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