| 18 April 2024, Thursday |

Bank of Canada surprises with 100-bp rate hike as price risks gather steam

The Bank of Canada surprised the markets on Wednesday by raising interest rates by a full percentage point, the largest increase since 1998. The bank cited “higher and more persistent” inflation as well as the increased risk of those price increases becoming entrenched.

In a routine rate decision, the central bank increased its policy rate from 1.5 percent to 2.5 percent and predicted further increases. The change was more significant than the predicted 75-basis-point increase predicted by economists and the money markets.

“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates,” the bank said.

“Interest rates will need to rise further,” it added.

The Bank of Canada also dramatically raised its near-term inflation forecasts and made clear it expects price gains to go higher, averaging around 8% in the middle quarters of 2022. Canada’s inflation rate hit 7.7% in May, near a 40-year high.

The central bank now sees inflation averaging 7.2% this year, falling to about 3% by the end of 2023 and then back to the 2% target by the end of 2024.

It noted a “sharp slowdown” in Canada’s housing market was underway, with that contraction expected to continue this year and into 2023.

Canada’s economic growth is now expected to be lower this year, with gross domestic product rising 3.5%, then slowing further to 1.8% in 2023.

The slower growth is “largely due to the impact of high inflation and tighter financial conditions on consumption and household spending,” the bank said. Its baseline forecast is for a soft landing, with no recession over the next three years.

Governor Tiff Macklem, who just recovered from COVID-19, participated in the rate decision remotely, the central bank said.

The Canadian dollar strengthened after the decision to 1.2956 to the greenback, or 77.18 U.S. cents, up 0.5% on the day.

  • Reuters