Bank of Canada hikes key interest rate to 4.25%, signals end of aggressive campaign may be near

The Bank of Canada raised its benchmark interest rate by 50 basis points, surprising markets with another oversized rate hike while signaling that it may be nearing the end of its historic rate-hike cycle.

The Wednesday announcement lifts the policy rate to 4.25 per cent from 3.75 per cent, the highest level since early 2008. Markets were expecting a smaller 25-basis-point increase. (A basis point is one hundredth of a percentage point)

The central bank also signalled in a statement accompanying the decision that a pause in rate hikes could be coming.

“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance,” the bank said in its one-page rate decision statement. In previous rate announcements, the bank had said that it expected rates “will need to rise further.”

The Bank of Canada’s key interest rate now sits at its highest level since 2008.
Wednesday’s move marks the seventh and final interest rate increase of the year, in what has been one of its most aggressive tightening cycles in its history.

Money markets and many economists had expected the central bank would move only 25 basis points in its final decision of the year.

But the Bank of Canada saw fit for a larger increase, mirroring the 50-basis-point hike in October as it seeks to further slow the economy.

The central bank’s policy rate is used to raise borrowing costs and slow spending demand among Canadians in hopes of bringing inflation back down to its two per cent target.

The Bank said in its statement Wednesday that it will be watching how interest rates are working to slow demand, how global supply challenges are resolving and whether inflation and expectations around rising prices are cooling to gauge the need for further rate hikes.

Though the policy rate has risen a total of four percentage points since March of this year, headline inflation remains at 6.9 per cent nationally, per Statistics Canada’s most recent data release.

Canada’s labour market also remains tight, with the unemployment rate ticking down to 5.1 per cent in November.

Home prices have dropped and housing activity has slowed significantly in most Canadian markets as mortgage rates climb in connection with the central bank’s rate.

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