OTTAWA, July 13 (Reuters) – The Bank of Canada raised its key interest rate by 100 basis points on Wednesday in a bid to crush inflation, surprising markets and becoming the first G7 country to make such an aggressive hike this economic cycle .
The central bank raised its key interest rate to 2.5% from 1.5%, its biggest increase in 24 years, and said more increases would be needed. Economists and money markets had expected an increase of 75 basis points. Read more
“We have indicated that we are ready to be stronger. It was stronger today,” Gov. Tiff Macklem said at a press conference after the decision.
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“Yes, it’s a very unusual move to go up 100 basis points in one decision, and it really reflects the very unusual, exceptional circumstances that we’re in.”
Earlier, the central bank said excessive demand, high inflation being felt across sectors and rising consumer expectations of sustained price rises led to the huge hike, which lifted the key interest rate to its highest level since 2008 .
“If this doesn’t get us back to the idea that Canada’s central bank is serious about reducing inflation, I don’t know what will,” said Jay Zhao-Murray, market analyst at Monex Canada.
The Bank of Canada’s move follows a 75 basis point rate hike by the U.S. Federal Reserve last month.
“The Bank of Canada saw the Fed’s 75 basis point hike and said, ‘Hold my beer,'” said Royce Mendes, head of macro strategy at Desjardins Group, noting the hawkish language in the statement accompanying the “colossal move.”
The central bank’s surprise move lifted the Canadian dollar, which was trading up 0.4 percent at 1.2975 for the greenback by late afternoon. Canada’s benchmark stock index (.GSPTSE) fell to its lowest level since March 2021 before recovering to trade flat.
SOFT LANDING
FILE PHOTO – Joggers run past the Bank of Canada building in Ottawa June 5, 2012. REUTERS/Chris Wattie
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In its July forecasts, also released on Wednesday, Canada’s central bank said it expects inflation to rise further, saying it will remain around 8% over the next few months. Inflation in Canada hit 7.7% in May, near a 40-year high.
The central bank now sees inflation averaging 7.2% this year, falling to around 3% by the end of 2023 and then back to the 2% target by the end of 2024. read more
Canada’s central bank has been trying to catch up with red-hot inflation for months, prompting rare attacks from critics and fueling concerns that Canadians may lose faith in its ability to control prices, leading to price spirals. Read more
“Our forecast is for a soft landing. As I said, the path to that soft landing has narrowed,” said Macklem, who participated in the decision remotely after recovering from COVID-19. “And that’s an important reason why we took stronger action today to front-load interest rates.”
Still, the 100 basis point move, coupled with a warning of more hikes to come, could spook markets, economists said.
“I think the market is going to be on edge here about the possibility of more rate hike surprises,” said Doug Porter, chief economist at BMO Capital Markets.
SLOWER GROWTH
The key interest rate is now at the nominal neutral rate – the midpoint between 2% and 3% – where monetary policy is neither stimulative nor restrictive. Read more
The bank also cut its economic growth forecast for this year to 3.5% from a previous estimate of 4.2%. It forecast growth to slow to 1.8% in 2023 before picking up to 2.4% in 2024.
The slower growth was “largely due to the impact of high inflation and tighter financial conditions on household consumption and spending,” the bank said.
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Additional reporting by Ismail Shakeel in Ottawa and Fergal Smith and Divya Rajagopal in Toronto; Editing by Deepa Babington
Our standards: The Thomson Reuters Trust Principles.
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