Bank of Canada raises rates, says it is prepared to raise them further

OTTAWA-The Bank of Canada on Wednesday raised its key overnight rate by a quarter of a percentage point to a 22-year high of 5 percent, saying it may raise rates further due to the risk of inflation stalling above its target for 2 percent.

Analysts and markets had expected the move to raise borrowing costs by 25 basis points for the second time in as many months. After a five-month hiatus, the BoC raised its overnight interest rate in June, saying monetary policy was not tight enough.

In its statement, the BoC backtracked, saying rates were not restrictive enough, but revised up its growth forecast for this year and pushed back its expectations of bringing inflation to target by six months to mid-2025.

“If new information suggests we need to do more, we are prepared to further increase our policy rate,” BoC Governor Tiff Macklem told reporters after the decision. “But we don’t want to do more than we have to.”

The BoC will base future policy decisions on the “assessment of incoming data and the inflation outlook,” Macklem said.

Canadian money markets raised bets for another rate hike after the move, seeing a nearly 30% chance of another hike at the next policy announcement in September.

Governing council members “want to take a few rounds of data and are leaving the door open for more (increases) as needed in September,” said Derek Holt, Scotia’s vice president of capital markets economics.bank. “I think they’re just taking the summer off.”

The Canadian dollar strengthened to a two-week high of 1.3144 to the US dollar, or 76.08 US cents, before easing to 1.3180, up 0.4 percent on the day.

“The Governing Council remains concerned that progress towards the 2 percent target could stall, jeopardizing a return to price stability,” the BoC said in a statement.

Despite nine previous rate hikes totaling 450 basis points since March of last year, the economy regained momentum in May, likely growing 0.4 percent on the month after stalling in April.

Still, bond yields fell as data showed a slowdown in US inflation and some economists were skeptical of another rate hike this year, including Royce Mendes, Desjardins Group’s chief macro strategist.

“While the Bank of Canada did not close the door on further monetary tightening, Canadians may finally be seeing some light at the end of the rate-hike tunnel,” Mendes said.

The BoC raised its forecast for second-quarter annualized quarterly growth to 1.5 percent from 1 percent in April, and growth is expected to expand to 1.5 percent in the third quarter as well. Overall real gross domestic product growth for 2023 is estimated at 1.8 percent compared with its April forecast of 1.4 percent.

“Supply-demand rebalancing is now expected to occur in early 2024,” the BoC said in its report containing new forecasts also published on Wednesday.

Although headline inflation slowed to 3.4 percent in May, less than half last year’s peak of 8.1 percent, the three-month annualized rates of the BoC’s core measures have not eased.

Surprisingly persistent demand, higher-than-expected housing costs and a more gradual decline in the prices of goods excluding food and energy are fueling inflation, the BoC said.

“Inflation is expected to return to 2 percent by mid-2025, although the timing is uncertain given inflation’s gradual movement toward the target,” the BoC said.

The BoC’s overnight target rate was last at 5 percent in March and April 2001.

Twenty of 24 economists polled by Reuters expected the central government bank raise rates by a quarter of a percentage point. Money markets had seen a more than 70 percent chance of a rate hike before the announcement.

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