The Bank of Canada has raised its key interest rate for the first time since slashing the benchmark rate to near-zero at the start of the COVID-19 pandemic, in a bid to tackle inflation rates that are likely to keep rising from their current three-decade high.
The central bank increased its key rate by a quarter of a percentage point to 0.5 per cent on Wednesday in a bid to help fight inflation, which is at its highest level since 1991.
The move prompted Royal Bank and TD to raise their prime lending rates — and other big banks were expected to follow — to increase the cost of loans such as variable-rate mortgages that are linked to the central bank’s benchmark rate.
In making its announcement, the Bank of Canada said it expects inflation to be higher in the near-term than previously thought. The central bank warned that this week’s rate hike won’t be the last, with economists expecting multiple increases before the end of the year.
Rate hikes in the past took place before the economy hit its full potential and inflation went up, said TD chief economist Beata Caranci. But circumstances are the opposite now, she said, raising the pressure on the bank to get right the timing and pace of hikes.
“They have actually less wiggle room because we are in a high inflation environment and they weren’t proactive as they were in past cycles,” she said.
“On the flip side, if things go horribly from an economic perspective, they don’t have room now to cut because we’re not at a level where they could give back stimulus.”
It was two years ago this week that the Bank of Canada first cut its key policy rate to get ahead of economic fallout from the emerging novel coronavirus crisis. What followed were two more rate cuts in March 2020 that brought the key policy rate to 0.25 per cent.
Have an opinion? Send it to [email protected]
