Bank of Canada announces new rate hike

The Bank of Canada has announced a 25-basis-point rise in its benchmark interest rate, resuming its rate-hiking strategy after pausing in the previous two announcements.

This increase brings the trendsetting rate to 4.75% and comes in response to recent data suggesting that the economy is still performing above the Bank’s desired level.

According to the Bank’s statement, the current monetary policy is considered “insufficiently restrictive” to restore the balance between supply and demand and bring inflation back to the targeted 2%.

The Bank acknowledges concerns about the possibility of inflation persistently exceeding the target level while maintaining its expectation that it will ease to around 3% by mid-summer.

In April, the annual inflation rate unexpectedly rose by 0.1% compared to the previous month, while GDP growth remained at a steady pace of 3.1% in the first quarter.

Despite the Bank’s efforts to slow down the economy, Canada’s labor market remains resilient, adding 41,000 jobs in April. Additionally, the national housing market is showing signs of rekindling after a prolonged slowdown.

This announcement marks a departure from the Bank’s recent inclination to maintain the rates unchanged, but it aligns with the expectations of about one in five economists surveyed by Bloomberg, who anticipated a rate increase.

Prior to the announcement, swap market traders had already anticipated an imminent rate hike, fully pricing in the increase before the Bank’s next scheduled decision on July 12.

Throughout most of the COVID-19 pandemic, the Bank maintained its benchmark rate at a historically low level of 0.25%, which significantly influenced variable mortgage rates in Canada. However, due to surging inflation last year, the Bank embarked on an aggressive rate-hiking campaign that resulted in a 425-basis-point increase within a year.

Source: https://www.mpamag.com/ca/mortgage-industry/market-updates/bank-of-canada-announces-new-rate-hike/448537