The Bank of Canada has increased its benchmark interest rate by a full percentage point, taking a larger than expected hike to tame decades-high levels of inflation.
The central bank’s key interest rate now sits at 2.5 per cent, a drastic shift from the 0.25 per cent rate seen at the start of the year.
Most economists had expected a 75 basis point increase, following the steps of the U.S. Federal Reserve last month. Markets had also priced in that hike.
Observers said the bank would be forced to take the oversized step as inflation continues to rage around the world. Global forces such as the war in Ukraine and supply chain snarls tied to COVID-19 lockdowns in China are among pressures that continue to drive prices higher.
Statistics Canada said in its last reading that inflation hit 7.7 per cent in May, the highest level since 1983.
A pair of surveys from the central bank last week also showed that both consumers and businesses are expecting inflation to remain higher for longer.
The Bank of Canada’s mandate sees it fight inflation by raising interest rates in an effort to make borrowing more expensive, discourage spending and ultimately take excess steam out of the economy.
Canada’s economy is running hot as of late, with the country’s labour force sporting a record-low 4.9 per cent unemployment rate in June and wages finally rising.
Economists at RBC predicted last week that the central bank’s efforts to raise interest rates will send Canada’s economy into a “moderate” but “short-lived” recession in 2023.
