The Bank of Canada on Wednesday raised its key rate from 0.5% to 1%, to fight against galloping inflation which should reach 6% on average during the first half of 2022 according to new forecasts.
The institution also warned that rates should rise further as the economy enters a phase of excess demand and inflation remains well above target.
The central bank has also announced that it will begin quantitative tightening as of April 25: Government of Canada bonds on the Bank’s balance sheet that fall due will no longer be replaced.
In a press release, the institution underlined that the conflict in Ukraine was a source of economic uncertainty which was disrupting the global recovery.
We expect further measured rate hikes with increases of 25 basis points each in June, July, September and October announcements, commented Royce Mendes, economist at Desjardins, the first major increase since May 2000.
The increase in the key rate was widely anticipated by analysts.
In February, inflation in Canada reached 5.7%, notably due to gasoline and food prices, a record level for 30 years. In this context, last month, the bank had raised its key rate from 0.25% to 0.5%, the first increase in more than three years.
The timing and pace of the increases will be guided by the Bank of Canada’s continued assessment of the economy, which is aiming for a 2% inflation target.
The Bank expects the Canadian economy to grow at 4.25% this year, before slowing to 3.25% in 2023.
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This new increase in the key rate comes at a time when the economic recovery is gaining momentum in Canada, which in March posted the lowest unemployment rate (5.3%) in its history.
The rise in the price of goods and services can be seen elsewhere in the world, particularly south of the border, where the United States announced an inflation rate of 8.5% on Tuesday, the highest level since 1981.
The next Canadian inflation data will be released next week.