OTTAWA – The Bank of Canada raised interest rates by the highest amount in more than 20 years and warned of more rate hikes as it upgraded its inflation outlook.
The central bank raised its key interest rate by half a percentage point to one percent on Wednesday.
Bank of Canada Governor Tiff Macklem said inflation was too high and was likely to stay high for longer than the bank previously thought.
“The invasion of Ukraine has pushed up energy and other commodity prices, and the war continues to disrupt global supply chains,” he said.
“We are also concerned about expanding pricing pressures in Canada.”
According to Macklem, Canadians should expect interest rates to continue to rise to more normal levels.
“By normal, we mean within what we consider to be a neutral interest rate that neither stimulates nor weighs on the economy,” he said.
The Bank of Canada on Wednesday revised its estimate for the nominal neutral interest rate – what the interest rate would be if inflation were stable and the economy was at full employment – to pre-pandemic levels of two to three cents.
The bank’s April 2021 estimate was between 1.75 percent and 2.75 percent.
Macklem’s warnings of further rate hikes were echoed in the central bank’s policy statement.
“As the economy moves into excess demand and inflation remains well above target, the governing council believes interest rates must continue to rise,” it said.
“The timing and pace of further interest rate hikes will be guided by the bank’s ongoing assessment of the economy and its commitment to meet the 2% inflation target.”
It also eases the stimulus measures from the pandemic era. The central bank will begin “quantitative tightening” from April 25, when the government bonds it holds will no longer be replaced at maturity. At the start of the pandemic, the Bank of Canada bought billions of dollars in government bonds to keep the cash flowing when the economy stalled.
The hike in the bank’s interest rate is expected to prompt major Canadian banks to raise their interest rates — a change that will increase the cost of benchmark-linked lending, including adjustable-rate mortgages.
In May 2000, the central bank raised its key interest rate by half a percentage point for the last time.
In its Spring Monetary Policy Report, released alongside the interest rate decision, the Bank of Canada raised its inflation expectations, in large part due to the rise in energy and other commodity prices in the wake of the Russian invasion of Ukraine.
It now expects the annual inflation rate to average nearly 6 percent in the first half of this year and remain well above its control range of 1 to 3 percent throughout 2022, before picking up to around 2 percent in the second half of 2023. 5 percent decreases.
In its January monetary policy report, the central bank said it expected inflation to hover at nearly 5 percent in the first half of 2022, before falling to around 3 percent by the end of the year.
The annual pace of inflation rose to 5.7 percent in February, up from 5.1 percent in January, Statistics Canada reported last month. The agency is expected to release its inflation figures for March next week, which will include the rise in petrol prices due to the Russian invasion of Ukraine.
In its outlook for the economy, the Bank of Canada said it expects growth to accelerate to an annual rate of 6.0 percent in the second quarter, up from 3.0 percent in the first quarter.
The impact of the Omicron COVID-19 variant weighed on the economy earlier in the year but was short-lived.
The bank said the housing market was strong in the first quarter, but expected sales to soften somewhat in the second quarter as mortgage rates rose.
The Bank of Canada has also trimmed its estimate for the nominal neutral rate to pre-pandemic levels of two to three percent. The bank’s April 2021 estimate was between 1.75 percent and 2.75 percent.
The central bank’s next interest rate announcement is scheduled for June 1st, while its next monetary policy report, which will include the updated outlook for the economy and inflation, is due to be published along with the bank’s interest rate decision on July 13th.
This report from The Canadian Press was first published on April 13, 2022.