Bank of Canada raises policy rate to highest level in 22 years

globalnews.ca:

The Bank of Canada has raised its benchmark interest rate by another 25 basis points, bringing it to levels not seen since 2001 amid fears the decline in inflation “could stall.”

The central bank’s key interest rate now stands at 5.0 per cent following back-to-back hikes.

Many economists, including Canada’s big six banks, had expected the move amid signs of resilience in the Canadian economy and fears that annual inflation would not fall all the way back to the central bank’s target of two per cent.

Raising the interest rate increases the cost of borrowing for Canadians, particularly for homeowners renewing their mortgages or those with variable-rate loans that see payments rise in line with the central bank’s benchmark rate.

The Bank of Canada’s tightening cycle has now seen the policy rate rise 4.75 percentage points since March 2022. The central bank held its key rate steady in two consecutive decisions this year but came off the sidelines last month with a quarter-percentage-point hike.

Overall inflation has cooled to 3.4 per cent in May from a recent peak of 8.1 per cent in June 2022, but the Bank of Canada’s policymakers have expressed concern that a tight labour market and a resilient economy could make it more difficult to tamp down inflation.

The central bank said in a statement accompanying the rate hike that it now expects inflation will hover around three per cent for the next year before “gradually declining to (two per cent) in the middle of 2025.” This is later than previous expectations that inflation would hit two per cent by the end of 2024.

The Bank of Canada’s governing council “remains concerned that progress towards the (two per cent) target could stall, jeopardizing the return to price stability,”