The Bank of Canada raises interest rates to the highest level in 22 years, and expects more increases

OTTAWA (Reuters) – The Bank of Canada on Wednesday raised its overnight interest rate to a 22-year high of 4.75 percent, and markets and analysts immediately expect another increase next month to cap an overheating economy and stubbornly rising inflation.

The central bank has been on hold since January to assess the impact of previous increases after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50% – the fastest tightening cycle in the bank’s history.

The central bank said in a statement that surprisingly strong consumer spending, a rebound in demand for services, a pickup in housing activity, and a tight labor market show that excess demand is more persistent than expected.

Noting inflation picked up in April and the fact that three-month measures of core inflation remained elevated, the Bank of Canada (BoC) said that “concerns have increased that CPI inflation could hang materially above the 2% target.”

Given this background, the Governing Council determined that “monetary policy has not been sufficiently restrictive to rebalance supply and demand and sustainably return inflation to the 2% target”.

The Canadian dollar was trading up 0.4% at 1.3350 per dollar, or 74.91 US cents, after touching its strongest level in four weeks at 1.3322. Money markets see a 60% chance of another rate hike in July and have priced it all in further to tighten by September.

“We expect another 25 basis points to come in July,” said Derek Holt, vice president of capital markets economics at Scotiabank. “It’s like a bag of chips, you open one and you can’t get it in.”

The last time the rate was 4.75% was in April and May 2001.

Bank of Canada Deputy Governor Paul Beaudry will speak and answer questions from the BC media on Thursday.

Crunch vs soft landing

The leader of Canada’s main opposition Conservative Party, Pierre Poilievre, spoke to his parliamentary caucus. He blamed Liberal Prime Minister Justin Trudeau for driving inflation with deficit spending and pushing the country toward a “full-blown financial crisis”.

However, Canadian Finance Minister Chrystia Freeland said the economic recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine led to an increase in prices.

She told reporters that no country was “better placed for an easy landing than Canada.” “We are very close to the end of this difficult time and a return to low and stable inflation and strong, steady growth.”

In April, annual inflation accelerated for the first time in 10 months to 4.4%. First quarter GDP increased by 3.1% – against the 2.3% expected by the Bank of Canada – and in April the economy expanded by 0.2%.

“The Canadian economy has shown remarkable resilience through 2023,” said Andrew Kelvin, chief Canadian strategist at TD Securities, who also expects another rally in July. “To reduce demand, which is the bank’s target for the 2% inflation target, we simply need to tighten further.”

The Bank of Canada said it will continue to assess economic indicators going forward to see if they are “in line with achieving the inflation target”.

But it dropped the wording in April’s previous policy statement saying it “remains willing to raise the policy price further” to make inflation targeted, leaving its next potential move more open-ended.

The Bank of Canada said it still sees inflation slowing to 3% this summer, but has not reiterated that it will slowly fall back to its 2% target by the end of next year as it did when it made its last forecast in April.

(Reporting by Steve Shearer and David Leungren). Additional reporting by Fergal Smith, Divya Rajagopal and Nivedita Balu in Toronto. Editing by Mark Porter

Our standards: Thomson Reuters Trust Principles.