Bank of Canada increases costs to 4.75%, the most elevated in almost two decades

June 8, 2023: On Wednesday, the Bank of Canada increased its key overnight benchmark speed to 4.75%, the highest level in two decades, on increasing concerns that inflation could get far above its 2% target amid persistent economic growth.   

The central bank had been on hold since January to assess the impact of previous hikes after raising borrowing costs eight times to a 15-year high of 4.50% – 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 labor market show 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 had run as high as 4% for several months, the Bank of Canada (BoC) said, “Concerns have increased that CPI inflation could get stuck materially above the 2% target”.  

Given this backdrop, the governing council determined “monetary policy was not sufficiently restrictive to bring supply and market back into balance and come back inflation sustainably to the 2% target.”   

The last time the rate hit 4.75% was in April and May 2001.   

Both money markets and analysts had seen a chance for a rate increase, but many thought one more likely at the next meeting in July. About two-thirds of economists polled by Reuters last week expected the central bank to keep rates on hold through to end-2023.

In April, annual inflation accelerated for the first time in 10 months to 4.4%. First-quarter GDP rose 3.1% – versus the 2.3% forecast by the BoC – and in April, the economy is seen expanding 0.2%.   

The BoC said it would continue to assess economic indicators in the future to see if they “are consistent with achieving the inflation target.”   

But it dropped language in the previous policy statement from April, saying it “remains prepared to raise the policy rate further” to get inflation to target, leaving its next possible move more open-ended.   

The BoC said it still saw inflation slowing to 3% this summer, but it did not reiterate that it would slowly come down to its 2% target by the end of next year as it did when it made its last forecasts in April.

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