Bank of Canada hikes key interest rate to 2.5 per cent

The Bank of Canada went over and above Wednesday.

The central bank raised its key interest rate by a full percentage point, to 2.5 per cent. The largest single hike since August of 1998 exceeded the forecasts from most economists, who predicted the rate would rise by 0.75 per cent.

The move signals the Bank of Canada is taking an aggressive approach to reining in inflation, which reached a 39-year high of 7.7 per cent in May.

“Inflation is too high and more people are getting more worried that high inflation is here to stay,” Bank of Canada governor Tiff Macklem said during a media conference. “We cannot let that happen. Restoring price stability, low, stable and predictable inflation is paramount.”

In a media release, the bank said the current inflation rate is higher than it predicted in its April Monetary Policy Report. The bank believes inflation will remain around eight per cent in the near future.

“While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent,” the bank added.

Macklem said the increase to the key interest rate reflects unusual economic circumstances in the country.

“By front-loading interest rate increases now, we’re trying to avoid the need for even higher interest rates down the road,” Macklem said. “Front-loading tightening cycles tend to be followed by softer landings.”

The bank’s release said Canada’s labour market is tight, with “widespread labour shortages, and increasing wage pressures.” As a result, companies are raising prices to cover higher labour costs.

But business investment has been good, with solid exports due to higher commodity prices.

“Economic activity will slow as global growth moderates and tighter monetary policy works its way through the economy,” the release said. “This, combined with the resolution of supply disruptions, will bring demand and supply back into balance and alleviate inflationary pressures.”

The bank said it believes interest rates will need to keep rising to combat inflation.

“Quantitative tightening continues and is complementing increases in the policy interest rate,” the bank wrote. “The Governing Council is resolute in its commitment to price stability and will continue to take action as required to achieve the two per cent inflation target.”

— With files from The Canadian Press