Bank of Canada raises interest rate

OTTAWA –

The Bank of Canada raised its overnight rate by 75 basis points, moving its policy rate to 3.25 per cent from 2.5 per cent. Since March, the bank has increased its policy rate by 300 basis points — the fastest pace since the mid-1990s — in an attempt to bring inflation back to its mandated two per cent target.

The bank attributes the war in Ukraine, ongoing COVID-19 lockdowns in China and volatile commodity prices as the main drivers of elevated global inflation.

Statistics Canada reported inflation rose by 7.6 per cent in July, down from its peak of 8.1 per cent in June. The drop was mainly due to a decrease in gas prices; however, other price measures for food and services remained high.

However, the bank said Canada’s core measure of inflation continue to rise, which prompts a greater risk that rising prices may become entrenched. The bank anticipates further increases to the policy rate will be needed to bring inflation lower to that two per cent target.

“They have set the stage for further rate hikes,” says Kevin Page, president and CEO of the Institute of Fiscal Studies and Democracy at the University of Ottawa. “They have to probably get their policy rate to 4 per cent.”

In July, the bank raised its interest rate by 100 basis points to 2.5 per cent, the highest rate hike since August 1998. During a press conference following the decision, Bank of Canada Governor Tiff Macklem promised a “soft landing” for the Canadian economy, while achieving the bank’s of bringing inflation back under control.

“We do think there is a path for a soft landing, but I will be very frank, that path is narrowing,” said Macklem, during an interview with CTV National News on July 20.

Canada’s gross domestic product grew by 3.3 per cent during the second half of 2022, slightly below the bank’s projection of four per cent.

The bank anticipates growth will continue to slow in the second half of the year, bringing demand back in line with supply in the Canadian economy.

The Bank of Canada’s next rate announcement is scheduled to take place on Oct. 26.

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