The country’s benchmark interest rate is rising half a percentage point, the Bank of Canada announced Wednesday, marking the first time it has raised rates by more than 25 basis points in more than two decades.
The central bank’s key overnight rate now stands at one per cent.
This is the second consecutive interest rate hike in 2022 after the Bank of Canada increased rates by 25 basis points in March, breaking a period of steady rates held at historic lows over the course of the COVID-19 pandemic.
Bank of Canada Governor Tiff Macklem said Canadians should expect interest rates to continue to rise toward more normal levels.
“By more normal we mean within the range we consider for a neutral rate of interest that neither stimulates or weighs on the economy,” he said.
The central bank’s signalled more rate hikes are coming through the year to tamp down on inflation, which it now expects to be higher than initially projected through the first half of 2022.
The Bank of Canada says the spike in energy and other commodity prices in the wake of Russia’s invasion of Ukraine are driving inflation higher than its earlier expectations.The bank now says the annual inflation rate will average almost six per cent in the first half of this year compared with its January forecast of close to five per cent.
“The invasion of Ukraine has driven up the prices of energy and other commodities, and the war is further disrupting global supply chains,” Macklem said.
“We are also concerned about the broadening of price pressures in Canada.”
The Bank of Canada is also easing pandemic-era stimulus measures by beginning so-called quantitative tightening later this month, when the government bonds it holds will no longer be replaced when they mature.
Prime Minister Justin Trudeau addressed the Bank of Canada’s move Wednesday, telling reporters in the Montreal area that the recently tabled federal budget will help Canadians weather rising interest rates.
He said it includes measures to help with the high cost of housing, including a tax-free savings account buyers can use to purchase a first home starting next year.
Trudeau says there isn’t any one thing governments can do to help with the rising cost of living, adding that his government is trying to implement measures that won’t make the problem worse.
Wednesday’s 50-basis-point hike was widely expected by economists and market watchers who argued the central bank would have to act swiftly to get rampant inflation under control.
The Bank of Canada last raised interest rates by 50 basis points in May 2000.
— with files from Canadian Press