The Bank of Canada has raised its benchmark interest rate by another 25 basis points, bringing it to levels not seen since 2001 amid fears the decline in inflation “could stall.”
The central bank’s key interest rate now stands at 5.0 per cent following back-to-back hikes.
Many economists, including Canada’s big six banks, had expected the move amid signs of resilience in the Canadian economy and fears that annual inflation would not fall all the way back to the central bank’s target of two per cent.
Overall inflation has cooled to 3.4 per cent in May from a recent peak of 8.1 per cent in June 2022, but the Bank of Canada’s policymakers have expressed concern that a tight labour market and a resilient economy could make it more difficult to tamp down inflation.
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The central bank said in a statement accompanying the rate hike that it now expects inflation will hover around three per cent for the next year before “gradually declining to (two per cent) in the middle of 2025.” This is later than previous expectations that inflation would hit two per cent by the end of 2024.
The Bank of Canada’s governing council “remains concerned that progress towards the (two per cent) target could stall, jeopardizing the return to price stability,” according to the statement.
CIBC senior economist Andrew Grantham said in a note to clients Wednesday morning that the tone of the Bank’s statement implies the risks are “skewed towards another hike after the summer.”
The Bank of Canada also released a new monetary policy report on Wednesday with revised expectations for economic growth.
The central bank now expects gross domestic product (GDP) growth of 1.5 per cent in both the second and third quarters of 2023.
On the year, the Bank expects GDP growth will be stronger than first expected in 2023 and slightly weaker in 2024.
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From CIBC’s perspective, Grantham said the economy could underperform the Bank of Canada’s expectations in the months ahead, which should allow the central bank to leave its policy rate unchanged for the rest of the year.
The Bank of Canada’s tightening cycle has now seen the policy rate rise 4.75 percentage points since March 2022. The central bank held its key rate steady in two consecutive decisions this year but came off the sidelines last month with a quarter-percentage-point hike.
Raising the interest rate increases the cost of borrowing for Canadians, particularly for homeowners renewing their mortgages or those with variable-rate loans that see payments rise in line with the central bank’s benchmark rate.
Prime Minister Justin Trudeau, speaking from the NATO summit in Lithuania, said the revelation that interest rates were moving even higher on Wednesday was “not the news that any Canadian wanted to receive this morning.”
Trudeau said the cost of living is a challenge facing other global leaders he has gathered with at the summit and he pointed to “targeted support” for Canadians with inflation such as the so-called “grocery rebate” that was delivered to an estimated 11 million households last week as evidence the government is taking the situation seriously.
“The cost of living is a real challenge everywhere around the world with record high inflation, with interest rates continuing to go up,” Trudeau said.
“We are very much focused on supporting Canadians, even as we create great jobs and grow the economy.”
— with files from Motorcycle accident toronto today’s Aaron D’Andrea
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