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Bank of Canada ends pause on hikes, raises policy rate by 25 basis points
The Bank of Canada raised its overnight rate by 25 basis points to 4.75 per cent on Wednesday, its first increase since pausing hikes in January. The central bank鈥檚 key interest rate has not been this high since April 2001.
Several factors led to the bank鈥檚 decision to raise the key interest rate, including economic growth in Canada. Gross Domestic Product exceeded expectations in the first quarter of this year, growing by 3.1 per cent.
The central bank says demand in the economy has rebounded, with surprisingly strong consumer spending. Housing market activity has picked up again and the Canadian labour market remains tight.
鈥淥verall, excess demand in the economy looks to be more persistent than anticipated,鈥 reads the release.
In April, inflation increased for the first time in 10 months to 4.4 per cent. The bank still expects inflation to decline to 3 per cent by this summer, but concerns remain that inflation could get stuck above the 2 per cent target.
鈥淕oods price inflation increased, despite lower energy costs,鈥 reads the statement. 鈥淪ervices price inflation remained elevated, reflecting strong demand and a tight labour market.鈥
Finance Minister Chrystia Freeland says Canada has made meaningful progress, with inflation dropping from its peak of 8.1 per cent last year to 4.4 per cent in April.
鈥淭he Bank of Canada has predicted that inflation will fall to 3 per cent this summer,鈥 Freeland said to reporters in Ottawa on Wednesday. 鈥淲e are very close to the end of this difficult time and to a return to low stable inflation and strong steady growth.鈥
The federal government has faced criticism from the opposition over its fiscal spending and Conservative Leader Pierre Poilievre is sounding the alarm on Canada鈥檚 household debt problem.
鈥淭his is on the verge of becoming a crisis and that is an overused term,鈥 Poilievre said during a caucus speech to his party in Ottawa. 鈥淎s these hundreds of billions of dollars of debt collide with massive increases in interest rates there will be a severe default crisis.鈥
Global inflation also remains high. Despite this, the economies of the United States and China are beginning to slow down and Europe鈥檚 economy has stalled.
The Organization for Economic Co-operation and Development (OECD) projects the global economy to grow moderately by 2.7 per cent in 2023 and global inflation to decline to 6.6 per cent this year, according to its economic outlook.
鈥淐ore inflation is proving sticky, on the back of strong service increases and higher profits in some sectors,鈥 reads the . 鈥淢onetary Policy should remain restrictive until there are clear signs that underlying inflationary pressures are durably reduced.鈥
Going forward, the Bank of Canada鈥檚 Governing Council will focus mainly on inflation expectations, wage growth, corporate pricing and excess demand to ensure these factors are in line with the inflation target.
The next scheduled rate announcement is expected on July 12, 2023.
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