Bank of Canada hikes rates to 5%, inflation seen above 2% until 2025
By Steve Scherer and Ismail Shakil
OTTAWA (Reuters) -The Bank of Canada (BoC) on Wednesday hiked its key overnight rate by a quarter of a percentage point to 5.00%, the highest level since 2001, saying it feared that efforts to return inflation to its 2% target could stall amid excess consumer spending.
The move to increase borrowing costs by 25 basis points for the second time in as many months was expected by analysts and markets. After a five-month pause, the BoC raised its overnight rate in June saying monetary policy was not sufficiently restrictive.
The BoC in its statement dropped the line saying rates were not restrictive enough but it revised higher its growth forecast for this year and pushed back its expectations for getting inflation to target by six months to mid-2025.
«With three-month measures of core inflation running in the 3.5%-4% range for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2% target,» the BoC said in a statement.
Canadian money markets increased bets for another rate hike after the move, seeing rates at 5.14% in December compared with 5.08% before the rate announcement.
The Canadian dollar strengthened to 1.3157 versus the U.S. dollar after the rate hike, up 0.6% on the day.
Despite nine previous rate increases totaling 450 basis points since March of last year, the economy regained momentum in May, likely growing 0.4% on the month, after stalling in April.
The BoC raised its forecast for second-quarter annualized quarterly growth to 1.5% from 1.0% in April, and growth is seen expanding 1.5% also in the third quarter. Overall 2023 real gross domestic product growth is seen at 1.8% compared with its April forecast
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