The Bank of Canada raised its key rate from 0.25% to 0.50% on Wednesday and left the door open for further hikes to counter Canadian inflation at its highest in 30 years, well beyond its target of 2%.
This is the first rate hike since October 2018 by the central bank, which also plans to end the reinvestment phase and will let its portfolio of Government of Canada bonds begin to decline.
The quantitative tightening resulting from this measure will be added to the increases in the key rate, the Bank of Canada said in a press release.
The institution also notes that Russia’s invasion of Ukraine is a major new source of uncertainty that will drive up inflation around the world and weigh on global growth.
This war is putting additional upward pressure on energy and food commodity prices. The Bank of Canada therefore now expects short-term inflation to exceed that of January (5.1%), which already represented a peak in 30 years, fueling fears related to the cost of living for households.
The Bank of Canada will have to find a balance between its desire to control inflation and the risks of cooling the economy too much, notes Royce Mendes of the Desjardins bank, which specifies that it expects another rate hike in April and two others in the future. anne.
In January, the central bank surprised by leaving its key rate unchanged.
But it now says it expects stronger-than-expected first-quarter growth after a better-than-expected fourth quarter.
Excess capacity in the economy has been reduced. Exports and imports have recovered, reflecting the strength of global demand, notes the Bank of Canada.