After noting that the sharp rise in interest rates over the past year was not enough to stifle inflation, the Bank of Canada decided to raise its key rate again.
The central bank announced on Wednesday an increase in interest rates by a quarter of a percentage point (0.25%). This increase brings its key rate to 4.75%, the highest level since 2001.
The main bank lenders quickly followed suit, raising their prime interest rate to around 7%.
The Bank of Canada’s move was watched because the Canadian economy shows no signs of slowing down and inflation appears to be resilient to the previous eight key rate hikes in just over a year.
Inflation measured by the consumer price index (CPI) stood at 4.4% in April, while the Bank of Canada wants to bring price inflation below the 3% level over the next few months. month.
In fact, the central bank finds that nothing is going as it planned.
In its press release published on Wednesday, the Bank of Canada explains that the excess demand for goods and services in the economy appears to be more persistent than expected.
She mentions in particular the tensions on the labor market, the stronger than expected economic growth in the first quarter and an increase in consumption “surprisingly strong and generalized”.
The central bank also points out that inflation was higher than expected in April, as prices for a “wide range of goods and services” continued to rise.
What economists say
Randall Bartlett, Senior Director of Canadian Economic Analysis, Mouvement Desjardins
“By opting for another rate hike, the Bank of Canada is clearly signaling that it “remains committed to restoring price stability for Canadians”. Going forward, I expect the central bank to raise its key rate again by 25 basis points (0.25%) in July, as progress [contre l’inflation] achieved by then will probably be few in number. The key rate would thus stand at 5%, its highest level since 2001.
Sébastien Lavoie, Chief Economist, Laurentian Bank Securities (LVBL)
“This other quarter-point increase in the Bank of Canada’s key rate (+0.25% to 4.75%) does not guarantee that inflation will subside sufficiently in the medium term. In fact, I expect the monetary tightening cycle [hausse de taux] will continue next July, with a key rate of 5%. And if the economic momentum does not slow down during the summer, nothing prevents us from considering additional rate hikes next September and October. »
Josh Nye, Senior Economist, Royal Bank (RBC)
“There are many reasons why the Bank of Canada resumed raising rates on Wednesday. On the one hand, economic growth was stronger than expected in the first quarter, driven by robust consumer spending. On the other hand, inflation surprised on the upside in April, unemployment remained stable near a record low for a fifth consecutive month, and the correction in the housing market seems complete. Against this backdrop, the Bank of Canada’s key message is that “excess demand in the economy appears more persistent than expected” and that there is a growing risk that inflation “could remain significantly above 2% target. »
James Orlando, Senior Economist, TD Bank
“The Bank of Canada has come off the sidelines and is back in the game with a surprise rate hike. The Canadian economy picked up steam in 2023 as strong job gains and wage increases allow Canadians to continue spending despite high interest rates. Clearly, the Bank of Canada has yet to see any signs of a slowing economy that could further dampen inflation towards its target (2%). Therefore, I expect it to raise rates further in July, with its key rate dropping from 4.75% to 5%. »
With the collaboration of Hélène Baril, The Press