The\u00a0<\/a>Bank\u00a0of\u00a0Canada\u00a0raised its key interest rate by a full percentage point on Wednesday, marking the largest single rate hike since August 1998.<\/p>\n

The central\u00a0bank’s decision signalled a more aggressive approach to bringing skyrocketing inflation, which hit a 39-year-high\u00a0of 7.7% in May, back down to its target of 2%.<\/p>\n

Bank\u00a0of\u00a0Canada\u00a0governor Tiff Macklem said the oversized rate hiked reflected “very unusual economic circumstances.”<\/p>\n

“Inflation is too high, and more people are getting more worried that high inflation is here to stay,” Macklem said.<\/p>\n

“We cannot let that happen. Restoring price stability — low, stable and predictable inflation — is paramount.”<\/p>\n

Macklem said higher interest rates will add to the difficulties that Canadians are already facing with high inflation but that if inflation becomes entrenched it will be more painful for the economy — and for Canadians — to get it back down.<\/p>\n

In its latest monetary policy report, the\u00a0Bank\u00a0of\u00a0Canada\u00a0said inflation in\u00a0Canada\u00a0is “largely the result\u00a0of\u00a0international factors,” but that “domestic demand pressures are becoming more prominent.”<\/p>\n

Most economists had forecasted a rate hike\u00a0of\u00a0three-quarters\u00a0of\u00a0a percentage point.<\/p>\n

Tu Nguyen, an economist with accounting and consulting firm RSM\u00a0Canada, said that while the rate announcement may have come as a surprise, it isn’t unreasonable given the rate\u00a0of\u00a0inflation, rising inflation expectations and the tight labour market.<\/p>\n

“As unsettling as this news is for consumers and businesses alike, an economy-wide recession is still unlikely in 2022,” said Nguyen, adding that economic indicators still point to a healthy economy.<\/p>\n

After raising interest rates by half a percentage point in June, Macklem said the central\u00a0bank\u00a0“may need to move more quickly” to bring inflation down.<\/p>\n

The rate hike Wednesday brings the Bank of Canada’s target for the overnight rate to 2.5% and is expected to prompt the commercial banks to raise their prime rates, which will increase the cost of loans linked to the benchmark such as variable rate mortgages and home equity lines of credit.<\/p>\n

In a note, CIBC senior economist Karyne Charbonneau said the Bank of Canada raising its key rate to a peak of 3.25% is now more likely.<\/p>\n

“With the Bank of Canada qualifying this larger step than anticipated as ‘front-loading,’ we still believe they could stop at 3%, but the risks that the peak reaches 3.25% have increased,” Charbonneau said.<\/p>\n

The central\u00a0bank\u00a0said the largest drivers\u00a0of\u00a0global inflation are the Russian invasion\u00a0of\u00a0Ukraine and ongoing supply disruptions, leading to higher global energy and food prices.<\/p>\n

Inflation in the U.S. soared to a new four-decade peak in June. Consumer prices rose 9.1% compared with a year earlier<\/a>, the government said on Wednesday.<\/p>\n

Statistics\u00a0Canada\u00a0is expected to release\u00a0Canada’s inflation data for June on July 20.<\/p>\n

Domestically, the\u00a0Bank\u00a0of\u00a0Canada\u00a0said “further excess demand has built up,” citing tight labour markets and strong demand.<\/p>\n

That excess demand is allowing businesses to pass more\u00a0of\u00a0their cost increases on to consumers, the\u00a0bank\u00a0said.<\/p>\n

The unemployment rate fell to a record-low of 4.9% in June as businesses continue to struggle with an ongoing labour shortage.<\/p>\n

The central\u00a0bank\u00a0is also citing concerns about rising inflation expectations among consumers and businesses. Economists generally worry when people begin expecting high inflation, as those expectations then feed into future prices set by business and wage negotiations.<\/p>\n

“The\u00a0bank\u00a0is guarding against the risk that high inflation becomes entrenched because if it does, restoring price stability will require even higher interest rates, leading to a weaker economy,” said the central\u00a0bank.<\/p>\n

In its forecast, the Bank of Canada expects GDP growth to begin to slow this year, growing by 1.75% in 2023 and 2.5% in 2024.<\/p>\n

It’s also forecasting inflation will remain at 8% over the next few months and begin to decline toward the end of the year and reach its target rate in 2024.<\/p>\n

The central\u00a0bank’s projections assume that globally, oil prices will gradually decrease, and supply chain disruptions will ease.<\/p>\n

“The governing council continues to judge that interest rates will need to rise further,” the\u00a0Bank\u00a0of\u00a0Canada\u00a0said in its decision, adding that the pace\u00a0of\u00a0these rate hikes will depend on the central\u00a0bank’s assessment\u00a0of\u00a0the economy and inflation.<\/p>\n","protected":false},"excerpt":{"rendered":"

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