OTTAWA: The Bank of Canada on Wednesday hiked its key overnight benchmark rate to 4.75%, the highest level in 22 years, on increasing concerns that inflation could get stuck significantly above its 2% target amid persistently strong economic growth.
The central bank had been on hold since January to assess the impact of previous hikes after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50% - the fastest tightening cycle in the bank’s history.
Surprisingly strong consumer spending, a rebound in demand for services, a pick-up in housing activity and a tight labor market show that excess demand in the economy is more persistent than anticipated, the central bank said in a statement.
Noting an uptick in inflation in April and the fact that three-month measures of core inflation had run as high as 4% for several months, the Bank of Canada (BoC) said, “Concerns have increased that CPI inflation could get stuck materially above the 2% target.”
Given this backdrop, the governing council determined that “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
The Canadian dollar rose 0.5% to 1.3330 per U.S. dollar after the announcement. Money markets see a near 60% chance of another rate hike in July and have fully priced in further tightening by September.
The last time the rate hit 4.75% was in April and May 2001.
Both money markets and analysts had seen a chance for a rate increase, but many thought one was more likely at the next meeting in July. About two-thirds of economists polled by Reuters last week expected the central bank to keep rates on hold through the end of 2023.
In April, annual inflation accelerated for the first time in 10 months to 4.4%. First-quarter GDP rose 3.1% - versus the 2.3% forecast by the BoC - and in April the economy is seen expanding 0.2%.
The BoC said it would continue to assess economic indicators going forward to see if they “are consistent with achieving the inflation target.”
But it dropped language that was in the previous policy statement from April saying it “remains prepared to raise the policy rate further” to get inflation to target, leaving its next possible move more open ended.
The BoC said it still saw inflation slowing to 3% this summer, but it did not reiterate that it would slowly come down to its 2% target by the end of next year as it did when it made its last forecasts in April.