The Bank of Canada raised its benchmark interest rate by 50 basis points, or 0.5%, and said it expects Canada’s red-hot inflation will remain elevated for the rest of the year. Canada’s central bank also said it would stop buying government bonds on April 25, which is referred to as quantitative tightening (QT).
The Bank of Canada increased its key lending rate from 0.5% to 1.0%, the biggest one-time increase since 2000. Typically, the central bank adjusts its policy by a quarter-point at a time.
Why Did The Bank of Canada Raise Its Rates So Much?
With Canadian inflation at a 30-year high of 5.7%, Bank of Canada Governor Tiff Macklem said that interest rates “will need to rise further” to help tame inflation. A year ago, central banks believed global inflation was just temporary, a result of supply chain issues. That’s no longer the case.
The central bank said Canada’s economic momentum is “strong” with consumer spending strengthening, tight labour markets, and wage gains being supported by exporters enjoying strong demand in high commodity prices. The war in Ukraine, which has led to higher food and energy prices, is also helping fuel strong stronger inflation.
As a result, the Bank of Canada said it had to revise its inflation outlook substantially higher. It now expects inflation to average 5.3% in 2022. Inflation is forecast to ease to 2.5% in 2023 and hit its two percent target in 2024.
To that end, the Bank of Canada said it expects Canada’s gross domestic product (GDP) will increase 4.25% in 2022 and slow to 3.25% in 2023 and 2024. This is up from January GDP forecasts of 4.0% this year and 3.5% next year.
The 0.5% hike in interest rates to 1.0% is certainly big, but the Canadian economy is as strong as it was before the pandemic. Back then, the Bank of Canada’s key benchmark rate was 1.75%. This suggests the Bank of Canada will need to hike its rates again when it next meets in June.
Given the concern over inflation, which is running at a three-decade high, another half point hike is certainly on the table. By this time next year, analysts believe the key lending rate will be near three percent.
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Soaring inflation has forced the Bank of Canada to play catch-up and raise its key lending rate by half a point to 1.0%. To eventually get inflation back down to its target of two percent, the central bank will most likely need to raise it another half point on June 1. Higher interest rates will have a ripple effect throughout the entire economy, which can cause businesses to amend or pause their growth plans. It can also cause investors to take profits. The trading professionals at Learn-to-Trade.com understand that rising interest rates don’t impact stocks equally. In fact, some sectors perform well during a higher interest rate environment.
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