The Bank of Canada raised the key overnight interest rate by another 25 basis points to five per cent — its highest level since 2001 — as governor Tiff Macklem suggested residual pandemic savings have delayed the impact of efforts to rein in inflation.
The July 12 rate hike, the latest in a series of aggressive hikes that started in early 2022, came despite some easing in inflation including lower energy prices.
“Inflation in Canada eased to 3.4 per cent in May, a substantial and welcome drop from its peak of 8.1 per cent last summer,” Macklem said.
However, he noted that the majority of goods in the consumer price index “basket” have continued to rise, some steeply.
“A little over half the components of the CPI basket, their prices are rising more than five per cent,” he said at a news conference after the rate announcement. “If you look across the basket, meat is up six per cent, bread is up 13 per cent, coffee is up eight per cent, baby food is up nine per cent … rent is up six per cent.”
Despite these increases, Canada’s economy has been stronger than expected with demand momentum and consumption growth “surprisingly strong at 5.8 per cent,” the Bank said in commentary explaining the latest rate decision.
Macklem said that while many households have cut back on spending because of higher inflation and interest rates, others accumulated savings since the beginning of the COVID-19 pandemic that “may be acting as a buffer and supporting consumer spending.”
Another surprise was the housing market, which is particularly sensitive to rate increases, defying expectations by showing signs of picking up after a slowdown earlier this year. Moreover, the job market remains tight, with wage growth of between four and five per
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