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Canada central bank hikes key rate from 1% to 1.5% to fight inflation

The Bank of Canada on Wednesday hiked its key lending rate by half a percentage point to 1.5 percent in an effort to throttle skyrocketing inflation.

In a statement, the bank warned that inflation, largely driven by higher prices for energy and food, had topped the bank’s forecast — reaching 6.8 percent in April — and would “likely move even higher in the near term before beginning to ease.”

And it signaled more rate increases to come, with analysts predicting another 50 basis points increase or higher in July — which would mark its third big rate hike in four months.

“The risk of elevated inflation becoming entrenched has risen,” the bank said, vowing to “use its monetary policy tools to return inflation to target and keep inflation expectations well anchored.”

In a research note, Desjardins analyst Royce Mendes said the current cycle of rate hikes is likely to persist at least through September.

“Extraordinary times call for extraordinary measures,” he commented.

But the central bank, he added, “will probably have to pause its hiking cycle ahead of many other peers, given the Canadian economy’s sensitivity to higher rates.”

CIBC Economics’s Avery Shenfeld suggested economic growth could slow in early fall, easing pressure on the bank to increase interest rates, which he predicted would top out at 2.5 percent in early 2023.

Inflation has become a global economic issue, soaring to a 30-year high in Canada and well above the bank’s mandated target of 2.0 percent.

Price increases continue to broaden with most Consumer Price Index categories well above that objective.

The Russian invasion of Ukraine, China’s Covid-19 lockdowns, and ongoing supply disruptions are all weighing on economic activity and boosting inflation.

And it is dampening the global outlook, particularly in Europe as it seeks to end its reliance on Russian oil and gas in protest of the war.

In Canada, the economy grew 3.1 percent in the first quarter of 2022, and equally strong growth is expected in the second quarter, bolstered by robust consumer spending and strengthening exports, the bank said.

Job vacancies remain elevated, it noted, as companies are reporting widespread labor shortages, and wage growth continues to pick up and broaden across sectors.

Housing market activity, however, is moderating from very high levels.

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AFP

Agence France-Presse (AFP) is a French state-owned international news agency based in Paris. It is the world's oldest news agency, having been founded in 1835 as Havas.




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