The Bank of Canada hiked its overnight rate to a 22-year high of 4.75 percent, and markets and analysts immediately forecast yet another increase next month to ratchet down an overheating economy and stubbornly high inflation.
The central bank had been on hold since January to assess the impact of previous hikes after raising borrowing costs eight times since March 2022 to a 15-year high of 4.5 percent – the fastest tightening cycle in the bank’s history.
Surprisingly strong consumer spending, a rebound in demand for services, a pick-up in housing activity and a tight labour market show that excess demand in the economy is more persistent than anticipated, the central bank said in a statement.
Noting an uptick in inflation in April and the fact that three-month measures of core inflation remained stubbornly high, the Bank of Canada (BoC) said, “Concerns have increased that CPI [consumer price index] inflation could get stuck materially above the 2% target.”
Given this backdrop, the governing council determined that “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
Money markets see more than a 60 percent chance of another rate hike in July and have fully priced in further tightening by September.
“We expect another 25 basis points coming in July,” said Derek Holt, vice president of capital markets economics at Scotiabank. “It is like a bag of chips: you open one and just can’t have one.”
The last time the rate hit 4.75 percent was in April and May 2001.
The BoC has no press conference scheduled on Wednesday, but Deputy Governor Paul Beaudry will speak and field questions from the media in British Columbia.— Aljazeera
