Bank of Canada hikes interest rate to 5%, warning inflation could linger – Financial Post

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The Bank of Canada raised its key interest rate by 25 basis points to 5 per cent Wednesday, warning that it could take longer than expected to tame inflation.

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Forecasters had widely expected the hike, the second after the central bank ended its pause in June.

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The Bank said in its statement that Canada’s economy has proven stronger than expected and the labour market remains tight with wage growth at about 4 to 5 per cent.

Financial Post

Policy makers said they expect growth to slow as higher interest rates work their way through the economy and their July Monetary Policy Report calls for real GDP growth of 1.8 per cent this year and 1.2 per cent in 2024.

Inflation, however, remains a concern. Though the consumer price index has dropped from its peak of 8.1 per cent last summer to 3.4 per cent in May, the decline has come mostly from lower energy prices, the Bank said. Core inflation, which has stayed at about 3.5 to 4 per cent, has proven more persistent than expected.

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The Bank said its Business Outlook Survey reinforced this, with businesses saying they were increasing their prices more frequently than normal.

The central bank pushed out its inflation forecast, now predicting that price growth will not return to target until the middle of 2025, about six months later than earlier forecasts.

“Governing Council remains concerned that progress towards the 2 per cent target could stall, jeopardizing the return to price stability,” said the statement.

The loonie jumped to its highest intraday level since June 27, trading at 76 US cents after the decision was released.The benchmark two-year yield, which had plunged earlier after U.S. inflation came in at a lower rate than expected, fell further to 4.675 per cent, Bloomberg reports.

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The bank reiterated that it “remains resolute” in its commitment to achieving price stability, but provided little guidance on the where rates might go from here.

However, Bank of Canada governor Tiff Macklem said in a news conference that it may not be the last.

“If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to,” he said.

“These decisions will be guided by our assessment of incoming data and the outlook for inflation. We need to see demand growth slow, wage pressures moderate and corporate pricing behaviour normalize.”

More to come …

With additional reporting by Bloomberg and Canadian Press

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