Bank of Canada raises key interest rate for the 10th time since March 2022

OTTAWA -

The Bank of Canada has raised its policy interest rate again, making the cost of borrowing more expensive.

The 25-basis-points hike brings the central bank’s overnight rate to five per cent, the highest it’s been since 2001.

“We’ve come a long way, and we don’t want to squander the progress we’ve made,” Bank of Canada Governor Tiff Macklem said Wednesday. “We need to stay the course to restore price stability.”

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In its Monetary Policy Report, the Bank of Canada says the rate increase was necessary to help slow economic growth and reduce core inflation. Three-month rates of core inflation have been higher than the Bank’s expectation, hovering around 3.5 per cent to four per cent since September 2022.

“The stubbornness of core inflation in Canada suggests that inflation may be more persistent than originally thought,” the Bank’s Monetary Police Report states.

Since the Bank of Canada started raising rates in March 2022, inflation has dropped from a peak of 8.1 per cent last summer to 3.4 per cent in May. This is the 10th interest rate hike since March 2022.

While the Bank acknowledges inflation has been declining due to falling energy prices, easing supply constraints and interest rate hikes, it predicts inflation will remain elevated around three per cent over the next year. The Bank says economic growth isn’t slowing as quickly as expected, citing more momentum for demand and stronger-than-anticipated consumer spending in the first quarter of 2023.

The downward momentum in inflation is waning, Macklem said, warning that it could trend back up if the Bank is not careful.

“It’s too early to talk about cuts,” Macklem said, when asked where the interest rate may go in the coming months.

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The central bank’s mandate is to keep inflation around two per cent, and its forecasters are currently predicting inflation will return to that two per cent level in the middle of 2025, two quarters later than previously projected.

The Bank’s forecasters say the change to the inflation outlook is due to excess demand, higher-than-expected housing prices, and higher-than-expected prices for tradable goods. The next stage in the inflation decline, the Bank says, will take longer and is more uncertain.

“The substantial drop in inflation over the past year is welcome news for all Canadians, but monetary policy still has work to do,” Macklem said. “Our job is not done until inflation is centered on our two per cent target.”

Since inflation has already been above its two per cent target for a few years, and isn’t expected to return to target until 2025, the Bank also warns that “it is possible that inflation expectations will remain higher for longer,” and that “progress towards the two per cent target could stall, jeopardizing the return to price stability.”

Right now, however, the Bank projects the Canadian economy will achieve a soft landing and avoid a recession.

“We do think there is a path back to price stability with the economy still growing,” he said.

Due to higher interest rates, the Bank expects Canada’s real GDP growth to slow to 1.5 per cent in the second quarter of 2023 and hover around one per cent through the second half of 2023 and into the first half of 2024. The Bank expects economic growth will pick up again in 2025 with GDP growth expected to hit 2.4 per cent.

Macklem said the Bank is trying to mitigate the risks of doing too much or doing not enough. If the Bank doesn’t do enough now, Macklem said the central bank will have to do “even more later.”

“Governing Council decided monetary policy was not restrictive enough,” Macklem said, adding there was a clear consensus “we didn’t see a clear benefit of waiting.”

The Bank of Canada’s next rate decision is set for Sept. 6.

And the Governor of the Bank of Canada is not ruling out another hike if the economy does not cool down, saying the Bank is taking it one decision at a time.