OTTAWA: The Bank of Canada on Wednesday raised interest rates by half a percentage point - its biggest single move in two decades - and promised more hikes as inflation expectations soar, in part because of the war in Ukraine.
The central bank raised its benchmark overnight rate to 1% from 0.5%. It also said it would allow government bonds it amassed during the COVID-19 pandemic to roll off as they mature, beginning what is known as quantitative tightening.
Both moves were in line with analyst expectations. The Bank of Canada last hiked by 50 basis points (bps) in May 2000.
“There is an increasing risk that expectations of elevated inflation could become entrenched,” the Bank said. “Interest rates will need to rise further.”
The Bank lifted its inflation forecast for the first half of the year to just below 6% compared to the 5% predicted in January. It also raised the forecast for 2022 to 5.3% from 4.2%, blaming Russia’s invasion of Ukraine for adding to global commodity prices, energy costs and supply chain disruptions.
Inflation hit a 30-year high of 5.7% in February, its 11th consecutive month above the Bank of Canada’s 1-3% range. The Bank last month hiked rates for the first time in three years, increasing them to 0.5% from a record low 0.25%.
It also updated its growth outlook, saying the economy would grow at a scorching 6% annualized rate in the second quarter, double the pace of the first, driven by consumer spending.
“A broad set of measures suggests that economic slack has been absorbed and that the economy is starting to operate beyond its productive capacity,” the April Monetary Policy Report said.
The Bank had signaled it would act “forcefully” to tackle red-hot inflation and Governor Tiff Macklem, last month, left the door open for a 50-bps hike.
Comments
Comments are closed.