The Bank of Canada has raised its benchmark interest rate by another 25 basis points, reaching levels not seen since 2001 due to concerns that the decline in inflation “could stall.”
The central bank’s key interest rate now stands at 5.0 percent following consecutive hikes.
Several economists, including Canada’s major banks, had anticipated this move due to signs of resilience in the Canadian economy and fears that annual inflation would not decrease all the way to the central bank’s two percent target.
Raising the interest rate increases borrowing costs for Canadians, especially for homeowners renewing their mortgages or those with variable-rate loans that see payments rise in line with the central bank’s benchmark rate.
The Bank of Canada’s tightening cycle has resulted in a 4.75 percentage point increase in the policy rate since March 2022. The central bank kept its key rate steady in two consecutive decisions this year but made a quarter-percentage-point hike last month.
Overall inflation has cooled to 3.4 percent in May from a recent peak of 8.1 percent in June 2022, but the Bank of Canada’s policymakers are concerned that a tight labor market and a resilient economy could make it more difficult to control inflation.
The central bank stated in a accompanying statement that it now expects inflation to remain around three percent for the next year before gradually declining to two percent in the middle of 2025. This is a later forecast than previously anticipated, which projected inflation to reach two percent by the end of 2024.
The Bank of Canada’s governing council is concerned that progress towards the two percent target could stall, jeopardizing the return to price stability.
More to come.
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