For the first time in two years, the Central Bank of Canada is raising its key rate to 0.5% to deal with galloping inflation, fueled in particular by the crisis in Ukraine.
Two years ago this week, the central bank embarked on a rate cut to help the economy deal with the crisis linked to the COVID-19 pandemic. In March 2020, the key rate was lowered twice, to 0.25%, the rate where it was maintained until Wednesday.
Now, despite the “major new source of uncertainty” that is the war in Ukraine, indicators of a strong recovery are pushing the Bank of Canada to begin a series of hikes in its key rate, in line with what had been announced. by Tiff Macklem, the institution’s governor, during the publication of the monetary policy report in January. The impacts of the Omicron variant of COVID-19 are fading faster than expected and Canadian economic growth in the fourth quarter reached 6.7%, notes the Bank of Canada.
By raising the key rate, the Central Bank is seeking to curb inflation, the level of which has soared to peaks in recent months. In January, as anticipated in the Bank’s forecasts, the annual rate of inflation measured by the CPI stood at 5.1%, which is however well above its target range of 2 %.
“All in all, near-term inflation is now expected to exceed the January projection,” the central bank wrote in a statement, suggesting that inflation may continue to rise rather than slow.
Notably, Russia’s invasion of Ukraine is inflicting a “marked rise” in the prices of oil and other commodities, the Bank notes. “This will drive up inflation everywhere, and the adverse effects on confidence as well as further supply disruptions could weigh on global growth,” she adds.
On Thursday, Tiff Macklem will speak to the CFA Society Toronto to provide an update on the current economic situation. The revision of the key rate will take place on April 13.
With The Canadian Press