Bank of Canada increases key interest rate to 1.5%

The Bank of Canada (BoC) today increased its target for the overnight rate to 1.5%, with the Bank Rate at 1.75% and the deposit rate at 1.5%.

With inflation persisting well above target and expected to move higher in the near term, interest rates will need to rise further, BoC said in a statement announcing the rate hike.

The central bank says “it is prepared to act more forcefully” if needed to meet its commitment to achieve the 2% inflation target. The pace of further increases in the policy rate will be guided by the Bank’s ongoing assessment of the economy and inflation.

Inflation globally and in Canada is said to be largely driven by higher prices for energy and food. In Canada, CPI inflation reached 6.8% for the month of April (well above the forecast) and will likely move even higher in the near term before beginning to ease, according to the BoC.

The increase in global inflation is occurring as the global economy slows, the Bank stated. The Russian invasion of Ukraine, China’s COVID-related lockdowns, and ongoing supply disruptions are all weighing on activity and boosting inflation. The war has increased uncertainty and is putting further upward pressure on prices for energy and agricultural commodities. This is dampening the outlook, particularly in Europe. In the United States, private domestic demand remains robust, despite the economy contracting in the first quarter of 2022. US labour market strength continues, with wage pressures intensifying. Global financial conditions have tightened and markets have been volatile.

The central bank says Canadian economic activity is strong and the economy is clearly operating in excess demand. National accounts data for the first quarter of 2022 showed GDP growth of 3.1 percent, in line with BoC’s April Monetary Policy Report (MPR) projection. Job vacancies are elevated, companies are reporting widespread labour shortages, and wage growth has been picking up and broadening across sectors. Housing market activity is moderating from exceptionally high levels. With consumer spending in Canada remaining robust and exports anticipated to strengthen, growth in the second quarter is expected to be solid.

The Bank of Canada is expected to announce further interest rate hikes in July and September.

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