OTTAWA | Faced with a surprisingly strong Canadian economy, the Bank of Canada raised its key rate again on Wednesday by 25 percentage points, bringing it to 5%.
This is the tenth increase since the spring of 2022, and the first time that the key rate has reached this level since 2001.
“Household spending has been robust, supported by strong demand for labour, population growth and accumulated savings,” the Bank worries in its latest Monetary Policy Report.
The decline in inflation is well underway, but progressing less rapidly than expected since the beginning of the year, since “demand still exceeds supply in Canada”, we write.
Towards another hike?
Bank Governor Tiff Macklem warned at a press conference that another hike was possible if inflation persists.
“We are ready to raise our key rate further, but we do not want to do more than necessary,” he said.
After a peak of 8.1% reached in the summer of 2022, inflation stood at 3.4% in May, among other things dragged down by the fall in gasoline prices.
The Bank notes with regret that inflation remains persistent in many sectors, such as food (9%), rents (6%), hotels (12%) and restaurants (7%).
The Bank of Canada anticipates reaching the 2% target in the middle of 2025, that is to say six months later than it forecast last January.
Inflation is expected to hover around 3% over the next year, it is expected.
Not enough housing
The housing shortage in a context of sustained population growth partly explains the persistence of inflationary pressures.
“Residential construction and listings are lagging behind demand, putting additional pressure on prices,” the central bank said.
“In a context where supply is still insufficient, resale prices rose in May for a second consecutive month,” said the Board of Directors of the Bank.
Economic growth has been boosted in particular by population growth resulting from immigration.
Overall, spending on furniture, clothing and recreational equipment was higher than expected.
A blow
Some Canadians will find this new key rate hike more difficult.
Those with a variable rate mortgage or those counting on a fixed income, such as poorer seniors, will be the first victims.
Prime Minister Justin Trudeau has acknowledged that rising interest rates are bad news for many Canadians.
“I understand how difficult it is to deal with these interest rates, inflation, the cost of living,” he commented, recalling that Ottawa has just sent 11 million Canadians a check for $234 to $628 to help them make ends meet.
The next key rate update is scheduled for early September.