The Bank of Canada announced its second interest rate hike of the year at Wednesday’s policy meeting. The central bank raised its benchmark interest rate by half a percentage point, the first oversized rate hike in decades and an aggressive step forward in its campaign to tackle runaway inflation.
How many more rate hikes are expected this year? What will they mean for inflation? Here’s everything we know about the latest Bank of Canada interest rate increase.
What rate hike did the Bank of Canada announce at its April policy meeting?
The Bank of Canada’s governing council agreed Wednesday to increase the policy rate to 1 per cent from 0.5 per cent, and said that more rate hikes will be needed to prevent inflation expectations from spiraling upwards. It typically moves in quarter-point increments and has not announced a half-point hike since May 2000.
This move puts the bank on track for the quickest monetary policy tightening cycle in decades, which could push borrowing costs for Canadian households and businesses above prepandemic levels by the end of the year.
“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,” the central bank said.
There was a broad consensus among economists ahead of Wednesday’s announcement that the bank would raise its policy interest rate by at least 0.5 per cent as a way to combat runaway inflation in Canada. There are economists who forecast a peak of as much as 2.5 per cent later this year or in 2023.
When was the last interest rate hike? Will there be more?
The bank raised its policy interest rate to 0.5 per cent from 0.25 per cent in early March – the first hike since 2018 and the start of what is expected to be a succession of increases that could bring borrowing costs back to prepandemic levels some time next year.
Borrowing costs are still well below historic levels, so economists and investors expect the bank to move quickly. Financial instruments that track market expectations about rate hikes suggest the bank will raise its policy rate at each of its six remaining decision dates in 2022: April 13, June 1, July 13, Sept. 7, Oct. 26 and Dec. 7. That would move the policy rate above its prepandemic level of 1.75 per cent.
Bank of Canada Governor Tiff Macklem has said higher borrowing costs are needed to prevent inflation expectations from becoming unmoored and to ensure that demand in the economy does not outstrip supply, further pushing up consumer prices.
“For households and businesses that are already feeling the pinch of inflation, the higher cost of borrowing can be doubly painful. But tighter monetary policy is necessary to lower the parts of inflation that are driven by domestic demand,” he said early last month.
What does the oversized rate hike mean for inflation?
Canada’s top central bankers had hinted in speeches over the past month that an oversized hike was on the table. The Bank of Canada’s Business Outlook Survey, released on April 4, added to the argument that the central bank needed to make such a move.
The Bank of Canada’s decision to start tightening monetary policy is in response to the highest inflation in decades, which has eroded the purchasing power of the Canadian dollar and challenged the central bank’s credibility as an inflation fighter. It has also become clear in recent months that the Canadian economy has largely rebounded from the pandemic-induced recession and no longer needs emergency monetary policy support.
Interest rate increases theoretically bring down both inflation and people’s expectations for future inflation.
Consumer price inflation has run above the central bank’s 1 per cent to 3 per cent target range for the past year, hitting a three-decade high of 5.7 per cent in February. Russia’s invasion of Ukraine has added to inflationary pressures, disrupting already fragile global supply chains and sending energy and food prices soaring.
Bank of Canada deputy governor Sharon Kozicki had previously said the central bank is “prepared to act forcefully” to bring high inflation under control, meaning rate increases could be bigger – and come sooner. Wednesday’s announcement marks a shift after a period of holding interest rates at record lows and taking a gradual approach to unwinding pandemic-era supports.
The bank’s updated economic projections on Wednesday show consumer price index growth averaging 5.3 per cent this year, up from its 4.2 per cent projection in January. It does not see the inflation rate returning to its 2 per cent target until 2024.
What’s the global landscape when it comes to interest rate hikes in other countries?
The Bank of Canada is not alone in signalling a more aggressive path for higher rates. Other central banks, most notably the U.S. Federal Reserve, have pivoted in recent months to forecasting a rapid rise in borrowing costs.
On March 16, the Fed raised its policy rate for the first time since cutting it at the outset of the pandemic. Fed officials expect to increase the rate at least six more times this year, according to projections published in mid-March.
Fed Chair Jerome Powell said the central bank needs to move “expeditiously” toward tighter monetary policy. It is expected to deliver two back-to-back 0.5-percentage-point interest rate hikes in May and June to tackle runaway inflation, according to economists polled by Reuters who also say the probability of a recession next year is 40 per cent. The U.S. Labor Department said Tuesday that U.S. inflation jumped 8.5 per cent in March from 12 months earlier, the sharpest increase since December 1981.
Meanwhile, the Bank of England raised interest rates for the third time in a row on March 17 in a bid to stop fast-rising inflation. The bank’s Monetary Policy Committee voted to raise the interest rate to 0.75 per cent from 0.5 per cent, taking the benchmark for borrowing costs back to its pre-pandemic level. Inflation in the United Kingdom accelerated to 7 per cent in the 12 months through March, the highest annual rate since March 1992, the Office for National Statistics said Wednesday.
Compiled by Abigale Subdhan.
With reports from Mark Rendell and Reuters.
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