Bank cites a stronger than expected economy and more persistent inflation than previously forecast.
Interest rates are going up again.
The Bank of Canada announced Wednesday morning it’s raising its key overnight interest rate by a quarter percentage point to 5 per cent, citing a stronger than expected economy, and more persistent inflation than previously forecast.
“In light of the accumulation of evidence that excess demand and elevated core inflation are both proving more persistent … Governing Council decided to increase the policy interest rate to 5 per cent,” the Bank said in a press release announcing its decision.
Most analysts expected the hike. Trading on the overnight interest swap market had priced in a 75 per cent chance.
The Bank also now expects inflation won’t come down to its target of two per cent until the middle of 2025.
At its last rate decision in June, the Bank surprised observers by raising the overnight rate to 4.75 from 4.5 per cent. That was the first hike since a “conditional pause” was announced by the Bank in January.
Last March, the Bank of Canada began an aggressive rate-hike campaign in a bid to drive down inflation, which soared as high as 8.1 per cent. In several steps, the Bank pushed its key overnight rate to 4.75 per cent from 0.25 per cent.
The theory is that by making it more expensive to borrow money, consumers — and businesses — will spend less, driving prices down and slowing the economy.
In May, the annual rate of inflation fell to 3.4 per cent, the lowest it’s been in almost two years. While that’s substantially lower than the 8.1 per cent inflation peaked at in June 2022, it’s still well above the Bank’s two per cent target.
The Bank argued that lower oil and gas prices is driving much of the decrease.
“While CPI inflation has come down largely as expected so far this year, the downward momentum has come more from lower energy prices, and less from easing underlying inflation,” the Bank said in its Wednesday release.
By Josh Rubin