Canada’s central bank raised its key interest rate by 0.75 percentage points to 3.25 per cent and warned of further increases in its fight to prevent high inflation from becoming entrenched.
The rate rise brings the key interest rate above 3 per cent for the first time since mid-2008 and into so-called restrictive territory, where monetary policy hampers economic growth.
“Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further,” the Bank of Canada said in a statement on Wednesday. “Quantitative tightening is complementing increases in the policy rate.”
The BoC said it would assess how much higher interest rates would need to rise to return to its inflation target of 2 per cent.
The rate increase is the central bank’s fifth this year, and was in-line with economists’ expectations, according to Refinitiv polling. It brings the cumulative tightening so far this year to 3 percentage points, “the fastest pace since the mid-1990s,” Bank of Montreal economist Benjamin Reitzes said.
BoC governor Tiff Macklem had previously spoken about a so-called soft landing where the bank would attempt to curb inflation without causing a recession. The central bank omitted such language in a short release on Wednesday.
Canada’s inflation rate moderated slightly in July as a result of lower petrol prices, but consumer prices were still up 7.6 per cent that month against a year earlier, Statistics Canada reported last month.
The central bank said it remained concerned about “a further broadening of price pressures”, particularly in services. The bank’s core measures of inflation moved up to a range of 5-5.5 per cent in July.
“The longer this continues, the greater the risk that elevated inflation becomes entrenched,” the bank said.
Officials highlighted that indicators of domestic demand — consumption and business investment — remained “very strong”.
The Wednesday rate rise comes after the BoC caught some market observers off-guard in July by raising its key interest rate 1 percentage point to 2.5 per cent. This was the largest rate increase since 1998.
“This is a short and sweet statement that buys time for them to reassess the outlook with new forecasts and surveys of inflation expectations into the October decisions,” said Derek Holt, the head of capital markets economics at Scotiabank.
Scotiabank and the Bank of Montreal both expect a 0.5 percentage point rate rise from the BoC at its next scheduled meeting on October 26.
