Bank of Canada Increases Interest Rate to 4.75%, Highest Since 2001

In a move to address inflation and economic overheating, the Bank of Canada raised its overnight rate to a 22-year peak of 4.75 percent on Wednesday. This decision marks the latest in a series of rate hikes, with the bank having increased borrowing costs eight times since March 2022, reaching a 15-year high of 4.5 percent. This series represents the fastest tightening cycle in the bank’s history.

The central bank’s decision responds to robust consumer spending, a resurgence in demand for services, increased housing activity, and a tight labor market, indicating that the economy’s excess demand is more persistent than previously thought. The bank noted an increase in inflation in April, with core inflation measures remaining high, fueling concerns about the consumer price index (CPI) inflation staying significantly above the 2 percent target.

With this context, the Bank of Canada determined the need for more restrictive monetary policy to balance supply and demand and sustainably return inflation to the 2 percent target. Money markets are anticipating further rate hikes, with over a 60 percent chance of an increase in July and full pricing in by September.

Derek Holt, vice president of capital markets economics at Scotiabank, expects an additional 25 basis point increase in July. The last time the rate was as high as 4.75 percent was in April and May 2001.

The Bank of Canada’s Deputy Governor Paul Beaudry is scheduled to speak and answer questions from the media in British Columbia on Thursday.

Pierre Poilievre, leader of Canada’s main opposition Conservative Party, criticized Prime Minister Justin Trudeau’s policies, blaming them for inflation and warning of a potential financial crisis. Conversely, Canada’s Finance Minister Chrystia Freeland attributed inflation partly to the economic rebound from the COVID-19 pandemic and Russia’s invasion of Ukraine. She expressed confidence in Canada’s potential for a “soft landing” and a return to stable growth and low inflation.

While some analysts and money markets had anticipated a rate increase, others expected a hold until the next meeting in July. The Bank of Canada’s actions come amid signs of resilient economic performance in Canada, with a stronger-than-expected rise in the first-quarter GDP and ongoing economic expansion in April.

Going forward, the Bank of Canada plans to continue assessing economic indicators to determine if further adjustments are needed to achieve the inflation target. However, the bank’s statement has become more open-ended, dropping previous language about being prepared to raise the policy rate further. Despite expecting inflation to slow to 3 percent this summer, the bank did not reiterate its previous forecast of reaching the 2 percent target by the end of next year.

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