Bank of Canada Hikes Interest Rates to the Highest Level in 22 Years

The Bank of Canada surprised some when it resumed its monetary tightening policy, increasing its benchmark interest rate by 25 basis points to 4.75%; the highest level since May 2001. This is also the first time that the Bank of Canada has raised its key lending rate since January.

At the start of the year the central bank announced its eight straight rate hike but Bank of Canada governor Tiff Macklem said the central bank would be pausing further rate hikes. This led some to erroneously believe the central bank would start cutting interest rates later this year.

Macklem put that optimism to rest by saying the Bank of Canada could still raise rates if it needs to in order to get stubbornly high inflation under control and heading down to its two percent target.

Still, the bank kept interest rates steady over the last two rate announcements at 4.5% while it took a wait and see approach to whether higher borrowing costs were high enough to curb spending and bring inflation down.

Inflation isn’t falling quickly enough it seems, with the central bank calling an end to its “conditional pause.” After nine months of declines, Canada’s inflation rate unexpectedly jumped to 4.4% in April.

Economic data shows the Canadian economy is quite resilient with strong Canadian consumer spending, tight labour market, and a big rebound in the housing market, more than enough to force an interest rate hike.

Will the Bank of Canada Raise Interest Rates Again in 2023?

The unexpected interest rate hike has many questioning whether even more rate hikes are on the way. Some investments have already priced in at least one more rate hike before the end of the year, which could take interest rates to 5.25% or higher.

Chances are good another rate hike is coming. Part of the problem is, it takes a while for monetary policy tightening to hit the economy. As a result, Canadians haven’t felt the full impact of higher interest rates yet. And its unlikely we’ll see enough movement on inflation before the next scheduled interest rate announcement in July.

Persistently high inflation means everything from groceries to gas to insurance and other day-to-day items and things we do will remain expensive. For consumers, rising interest rates means it will cost more to pay their debt, especially rate sensitive debt like variable rate mortgages, home equity lines of credit, car loans, and credit cards. For businesses, rising interest rates makes it more expensive to borrow, which discourages spending and could help tip the economy into a recession.

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Also Read: Canadian Retail Spending Is Robust, Despite Rising Interest Rates