Canadian Manufacturing

Bank of Canada raises interest rate, says more hikes to come

Bank of Canada governor Tiff Macklem said inflation is too high and is expected to stay elevated for longer than the bank previously thought.

April 13, 2022   The Canadian Press

The Bank of Canada raised its key interest rate by the highest amount in more than 20 years and warned more rate hikes are coming as it increased its outlook for inflation.

The central bank hiked its policy interest rate by half a percentage point to one per cent on Apr. 13.

Bank of Canada governor Tiff Macklem said inflation is too high and is expected to stay elevated for longer than the bank previously thought.

“The invasion of Ukraine has driven up the prices of energy and other commodities, and the war is further disrupting global supply chains,” he said.

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“We are also concerned about the broadening of price pressures in Canada.”

Macklem said Canadians should expect interest rates to continue to rise toward more normal levels.

“By more normal we mean within the range we consider for a neutral rate of interest that neither stimulates or weighs on the economy,” he said.

The Bank of Canada on Apr. 13 returned its estimate for the nominal neutral rate — what the interest rate would be if inflation were stable and the economy at full employment — to its pre-pandemic level of a range between two per cent and three per cent.

The bank’s April 2021 estimate was a range of 1.75 per cent to 2.75 per cent.

The increase in the bank’s key interest rate is expected to prompt Canada’s big banks to raise their prime rates — a change that will increase the cost of loans linked to the benchmark, including variable-rate mortgages.

The last time the central bank raised its key interest rate by half a percentage point was May 2000.

In its spring monetary policy report released along with the interest rate decision, the Bank of Canada raised its expectations for inflation due in large part to the spike in energy and other commodity prices in the wake of Russia’s invasion of Ukraine.

It said it now expects the annual inflation rate to average almost six per cent in the first half of this year and remain well above its control range of one to three per cent throughout 2022 before easing to about 2.5 per cent in the second half of 2023.

In its January monetary policy report, the central bank had said it expected inflation to be close to five per cent in the first half of 2022 before falling to about three per cent by the end of the year.

The central bank’s next interest rate announcement is set for June 1, while its next monetary policy report, which will include its updated outlook for the economy and inflation, is scheduled to be released along with the bank’s July 13 interest rate decision.