OTTAWA -- The Bank of Canada has raised its policy interest rate again, making the cost of borrowing more expensive.

The 25-basis-points hike brings the central bank鈥檚 overnight rate to five per cent, the highest it鈥檚 been since 2001.

鈥淲e鈥檝e come a long way, and we don鈥檛 want to squander the progress we鈥檝e made,鈥� Bank of Canada Governor Tiff Macklem said Wednesday. 鈥淲e need to stay the course to restore price stability.鈥�

In its Monetary Policy Report, the Bank of Canada says the rate increase was necessary to help slow economic growth and reduce core inflation. Three-month rates of core inflation have been higher than the Bank鈥檚 expectation, hovering around 3.5 per cent to four per cent since September 2022.

鈥淭he stubbornness of core inflation in Canada suggests that inflation may be more persistent than originally thought,鈥� the Bank鈥檚 Monetary Police Report states.

Since the Bank of Canada started raising rates in March 2022, inflation has dropped from a peak of 8.1 per cent last summer to 3.4 per cent in May. This is the 10th interest rate hike since March 2022.

While the Bank acknowledges inflation has been declining due to falling energy prices, easing supply constraints and interest rate hikes, it predicts inflation will remain elevated around three per cent over the next year. The Bank says economic growth isn鈥檛 slowing as quickly as expected, citing more momentum for demand and stronger-than-anticipated consumer spending in the first quarter of 2023.

The downward momentum in inflation is waning, Macklem said, warning that it could trend back up if the Bank is not careful.

鈥淚t鈥檚 too early to talk about cuts,鈥� Macklem said, when asked where the interest rate may go in the coming months.

The central bank鈥檚 mandate is to keep inflation around two per cent, and its forecasters are currently predicting inflation will return to that two per cent level in the middle of 2025, two quarters later than previously projected.

The Bank鈥檚 forecasters say the change to the inflation outlook is due to excess demand, higher-than-expected housing prices, and higher-than-expected prices for tradable goods. The next stage in the inflation decline, the Bank says, will take longer and is more uncertain.

鈥淭he substantial drop in inflation over the past year is welcome news for all Canadians, but monetary policy still has work to do,鈥� Macklem said. 鈥淥ur job is not done until inflation is centered on our two per cent target.鈥�

Since inflation has already been above its two per cent target for a few years, and isn鈥檛 expected to return to target until 2025, the Bank also warns that 鈥渋t is possible that inflation expectations will remain higher for longer,鈥� and that 鈥減rogress towards the two per cent target could stall, jeopardizing the return to price stability.鈥�

Right now, however, the Bank projects the Canadian economy will achieve a soft landing and avoid a recession.

鈥淲e do think there is a path back to price stability with the economy still growing,鈥� he said.

Due to higher interest rates, the Bank expects Canada鈥檚 real GDP growth to slow to 1.5 per cent in the second quarter of 2023 and hover around one per cent through the second half of 2023 and into the first half of 2024. The Bank expects economic growth will pick up again in 2025 with GDP growth expected to hit 2.4 per cent.

Macklem said the Bank is trying to mitigate the risks of doing too much or doing not enough. If the Bank doesn鈥檛 do enough now, Macklem said the central bank will have to do 鈥渆ven more later.鈥�

鈥淕overning Council decided monetary policy was not restrictive enough,鈥� Macklem said, adding there was a clear consensus 鈥渨e didn鈥檛 see a clear benefit of waiting.鈥�

The Bank of Canada鈥檚 next rate decision is set for Sept. 6.

And the Governor of the Bank of Canada is not ruling out another hike if the economy does not cool down, saying the Bank is taking it one decision at a time.

Correction:

An earlier version of this article said the latest increase was the 10th consecutive hike. It's the 10th since March 2022, but because the Bank of Canada opted to pause the rate earlier this year, it is not the 10th consecutive hike.