Bank of Canada raises key interest rate to 4.25 per cent, its highest since 2008
The Bank of Canada has raised its overnight rate by 50 basis points to 4.25 per cent, marking its seventh rate hike in nine months. The last time the bank’s policy rate was this high was in January 2008.
The inflation rate remained high at 6.9 per cent in October, well above the bank’s 2 per cent target. Higher gas prices put upward pressure on the cost of most goods and services, according to the Consumer Price Index released by Statistics Canada last month.
The bank says the economy continued to operate in excess demand during the third quarter and the labour market in Canada remained tight. With unemployment remaining at historic lows, Statistics Canada reported average hourly wages rose by 5.6 per cent year-over-year in October.
The bank says tighter monetary policy is affecting domestic demand in the Canadian economy, with declines in the housing market and consumption moderating during the third quarter. Since its monetary report in October, the bank continues to expect economic growth to stall through the end of this year and into the first half of 2023.
“The November GDP data showed us that economic activity in Canada had already started to shrink,” said Sheila Block, senior economist with the Canadian Centre for Policy Alternatives. “Given that slowdown, any hopes for a soft landing have been crushed by today’s rate hikes.”
During a press conference following the bank’s last rate announcement on Oct. 27, Bank of Canada Governor Tiff Macklem signalled “the tightening phase will draw to a close, we are getting closer, but we aren’t there yet.”
On Wednesday, the bank did not rule out further rate increases to tackle inflation.
“Looking ahead, Governing Council will be considering whether the policy interest rate needs to rise further to bring supply and demand back into balance and return inflation to target,” reads the release.
However, experts think it will be difficult for the bank to raise rates during a period of low growth.
“It will be very hard for a central bank to raise interest rates when the economy is in a recession,” said Kevin Page, Institute of Fiscal Studies and Democracy President and CEO. “I think it is highly probable that the central bank will not need to raise interest rates in the short term (next three to six months).”
Speaking to reporters in Ottawa, Conservative Leader Pierre Poilievre blamed the cost of living crisis on the federal government’s increased spending during the pandemic.
“It’s another uppercut for Canadians,” said Poilievre. “It’s all because of the inflationary deficits and spending of Justin Trudeau.”
Meanwhile, NDP Leader Jagmeet Singh called for other measures to help combat inflation.
“The federal government has to do more to look at the solutions around inflation,” said Singh during a press conference in Ottawa. “Some of those solutions include acknowledging that high profits in the corporate sector -- corporate greed -- is contributing to the cost of living going up.”
In the House of Commons, Associate Minister of Finance Randy Boissonnault defended his government’s policies to address the increased cost of living.
“The bank is doing their job. We’re doing our job by making sure we have the fiscal fire power to face what’s going to come,” he said during Question Period. “We’re helping Canadians to buy a new home, we’re advancing the payments for worker benefits and we’re also making sure student loan interest gets removed forever.”
The next policy rate announcement is expected on Jan. 25, 2023.
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