The Bank of Canada raised its key interest rate for the first time since cutting the benchmark rate to near zero at the start of the COVID-19 pandemic, in a bid to fight interest rates. inflation which are expected to continue to rise from their current three levels. -decade high.
The central bank on Wednesday raised its key rate by a quarter of a percentage point to 0.5% in a bid to tackle inflation, which is at its highest level since 1991.
The move prompted Royal Bank and TD to raise their prime rates – and other big banks were expected to follow – to raise the cost of loans such as variable-rate mortgages linked to the central bank’s benchmark rate.
In making its announcement, the Bank of Canada said it expects inflation to be higher in the near term than previously thought. The central bank has warned that this week’s rate hike will not be the last, with economists expecting multiple hikes before the end of the year.
In the past, rate hikes have taken place before the economy reaches its full potential and inflation rises, said TD chief economist Beata Caranci. But circumstances are the opposite now, she said, increasing the pressure on the bank to get the rides on the right time and pace.
“They actually have less room to maneuver because we’re in a high inflation environment and they haven’t been proactive like they were in previous cycles,” she said.
“On the other hand, if things go wrong economically, they don’t have the leeway now to cut because we’re not at a level where they could give stimulus back.”
Two years ago this week, the Bank of Canada first cut its key rate in anticipation of the economic fallout from the emerging novel coronavirus crisis. This was followed by two further rate cuts in March 2020 which took the key rate to 0.25%.
Since then, the economy has rebounded rapidly.
Statistics Canada said on Tuesday that the economy grew at an annual rate of 6.7% in the last three months of 2021, which was stronger than the Bank of Canada had forecast, and that the gross domestic product real is now above pre-pandemic levels.
The bank said it expects growth in the first quarter of this year to be stronger than its previous projections in January, even with an Omicron-related setback this month that resulted in the loss of 200,000 jobs.
He expects the labor market pullback to be temporary and strong household spending to strengthen further as public health restrictions ease, as several provinces began to do this month. .
Russia’s unprovoked invasion of Ukraine adds to existing inflationary pressures, pushing up global oil prices and adding new problems to global supply chains.
In response, Industry Minister Francois-Philippe Champagne told reporters on Parliament Hill that he had asked the Competition Bureau to monitor pump prices and that he had spoken to companies about the possibility of increasing national production to counter possible shortages.
While the bank can’t specifically tackle conflict-related inflation, it can tackle domestic price increases like those in the country’s property market, said Royce Mendes, managing director and head of macro strategy at Desjardins. .
The bank hopes that by making borrowing more expensive, buyer demand will cool.
“Those are the kinds of inflationary pressures that the Bank of Canada can contain by raising its interest rates and that’s what it’s trying to do,” Mendes said.
The first rate hike could have the biggest impact on how households manage their debt, but the central bank would have to raise rates by a full percentage point before there is any effect on the housing market country,” said BMO Chief Economist Douglas Porter.
“Every base point matters to someone,” Porter said. (A basis point is one hundredth of a percentage point.)
“We would need to see a number of interest rate hikes from the Bank of Canada before this really starts to seriously affect the economy.”
A rate hike typically takes as little as six months or up to 18 months to have an effect on headline inflation.
A more immediate concern for the bank’s top policymakers, and mentioned in Wednesday’s announcement, is that Canadians are starting to expect inflation to stay higher for longer, which could lead to runaway inflation.
“In this sense, inflation expectations cause inflation,” said Tu Nguyen, economist at RSM Canada. “So the bank that takes action and adopts a hawkish tone can help, in a way, to reassure consumers and businesses that this surge of high inflation is not going to last forever.”
This report from The Canadian Press was first published on March 2, 2022.