Bank Of Canada Hikes Benchmark Interest Rate To One Percent
HALIFAX–The Bank of Canada has increased its benchmark interest rate by half a percentage point, bringing it to one percent. The hike represents the largest one-time increase to the bank’s key policy rate in more than two decades.
Tiff Macklem, the governor of the Bank of Canada, says Canadians can expect more increases in the near future and expect future increases to bump the prime rate to a more traditional level, around two or three percent.
“While we’ve been clear with Canadians that they should expect a rising path for interest rates, seeing their mortgage rates and other borrowing costs increase can be worrying,” Macklem said. “We will be assessing the impacts of higher interest rates on the economy carefully.”
Macklem suggests that by raising the key interest rate, the inflation rate should start to go down. The bank’s target is to keep inflation at 2 percent per year. Right now, inflation in Canada is at 5.7 percent.
“We’ve taken important steps. We’ve increased our interest rate today by 50 basis points to one percent. We’ve signaled that interest rates need to rise further. That will moderate spending growth in Canada. That will bring demand more in line with supply,” he said.
In a news release, the Bank of Canada says the primary driver of its rate increase is Russia’s war in Ukraine.
Price spikes in oil, natural gas, and other commodities are adding to inflation around the world. Meanwhile, supply disruptions are adding to an already strained supply of goods moving around the world.
“These factors are the primary drivers of a substantial upward revision to the Bank’s outlook for inflation in Canada,” the bank says.
While the world’s economy remains volatile, In Canada, the economy is beginning to normalize even as labour markets are tight and wage growth is back to its pre-pandemic pace.
“Businesses increasingly report they are having difficulty meeting demand and are able to pass on higher input costs by increasing prices,” the bank says.
Despite those higher prices, consumer spending is “strengthening,” as public health restrictions are lifted.
The Bank forecasts that Canada’s economy will grow by 4.25 percent this year, before slowing to 3.25 percent in 2023, and 2.25 percent in 2024.
“Robust business investment, labour productivity growth and higher immigration will add to the economy’s productive capacity, while higher interest rates should moderate growth in domestic demand,” the bank says.
With files from Acadia Broadcasting reporter, Tim Davidson.