The Bank of Canada raised its key interest rate by the highest amount in more than 20 years and warned more rate hikes are coming as it increased its outlook for inflation.
The central bank hiked its policy interest rate by half a percentage point to one per cent on Wednesday.
Bank of Canada governor Tiff Macklem said inflation is too high and is expected to stay elevated for longer than the bank previously thought.
“The invasion of Ukraine has driven up the prices of energy and other commodities, and the war is further disrupting global supply chains,” he said.
“We are also concerned about the broadening of price pressures in Canada.”
Macklem said Canadians should expect interest rates to continue to rise toward more normal levels.
“By more normal we mean within the range we consider for a neutral rate of interest that neither stimulates or weighs on the economy,” he said.
The Bank of Canada on Wednesday returned its estimate for the nominal neutral rate — what the interest rate would be if inflation were stable and the economy at full employment — to its pre-pandemic level of a range between two per cent and three per cent.
The bank’s April 2021 estimate was a range of 1.75 per cent to 2.75 per cent.
Macklem’s warnings about further rate hikes were echoed in the central bank’s policy statement.
“With the economy moving into excess demand and inflation persisting well above target, the governing council judges that interest rates will need to rise further,” it reads.
“The timing and pace of further increases in the policy rate will be guided by the bank’s ongoing assessment of the economy and its commitment to achieving the two per cent inflation target.”
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