Bank of Canada hikes key rate by 50 basis points for second time in a row

·3 min read
Bank of Canada Governor Tiff Macklem takes part in a news conference in Ottawa, Ontario, Canada March 3, 2022. REUTERS/Blair Gable
The Bank of Canada hiked its benchmark rate again on Wednesday. (REUTERS/Blair Gable)

The Bank of Canada raised its benchmark interest rate 50 basis points on Wednesday, the second consecutive outsized hike as the central bank tries to tame roaring inflation.

The hike brings the policy interest rate to 1.5 per cent, a decision that was widely predicted by economists and priced in by markets.

The Bank of Canada also warned of more hikes to come, saying on Wednesday that it is "prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target."

"Canadian economic activity is strong and the economy is clearly operating in excess demand," the central bank said in a release about the decision.

"With the economy in excess demand, and inflation persisting well above target and expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further."

The central bank has embarked on an aggressive path to tighten monetary policy in the wake of skyrocketing inflation. The Consumer Price Index (CPI) has soared in recent months, with inflation hitting a three-decade high of 6.8 per cent in April. The Bank of Canada's target for inflation is two per cent. It has estimated that the neutral range, where the interest rate is no longer stimulative, is within two to three per cent.

All eight major components of CPI jumped that month, with food and shelter prices accelerating at a faster rate than in March. Canadians paid nearly 10 per cent more for groceries in April, the largest increase since Sept. 1981.

The Bank of Canada said it expects inflation will likely move even higher in the near term before it starts to ease. It said that almost 70 per cent of all CPI categories now show inflation above three per cent.

Bank of Canada tone 'beyond hawkish'

Economists widely expect the Bank of Canada will hike its overnight rate by another 50 basis points in July. But the strong language in Wednesday's release raises the question of further aggressive hikes.

Douglas Porter, chief economist at BMO Capital Markets, said the central bank's overall tone "is above and beyond hawkish."

"They seemed to me to give a bit of a hint that, while everyone's expecting a 50 basis point hike again at the next meeting, they could be leaning toward something even more," he said.

"If not more than 50 basis points at the July meeting, then 50 basis points at the meeting beyond July. So, overall, I get the sense that... the Bank's concern is mounting. Clearly they underestimated inflation even as recently as the past meeting, and they're basically trying to make up for lost time now."

CIBC economist Avery Shenfeld said a 50 basis point hike in July would fit the Bank's definition of forceful measures, but that its warning about acting "more forcefully if needed" runs counter to the forecast that interest rate growth would decelerate by early fall.

With files from Reuters

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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