In an effort to slow the Canadian economy and bring inflation down from four-decade highs, the Bank of Canada increased interest rates for the fourth time in a row.
Wednesday, policymakers led by Governor Tiff Macklem increased the overnight rate by 75 basis points to 3.25 percent, making Canada’s central bank the advanced economy with the highest policy rate. Officials anticipate further rate increases in the coming months.
“Given the inflation outlook, the governing council continues to believe that the policy interest rate will need to increase,” authorities said in a statement.
The discussion has now shifted to Macklem’s next measures, as the central bank assesses how high borrowing costs will need to increase to combat persistent inflation. The markets are pricing in a high probability of another half-point increase in October.
In Toronto trade at 10:09 a.m. on the day of the announcement, yields on two-year Canadian government bonds jumped 1 basis point to 3.62 percent. The Canadian currency fell 0.3% to C$1.3183 per U.S. dollar, representing little change.
While eliminating all references to “front-loading” increases, the statement signals that the Bank of Canada has moved its focus to minor policy adjustments and is examining where authorities can begin to wind down the tightening drive.
“As the consequences of tighter monetary policy ripple through the economy, we will assess how much higher interest rates must rise to return inflation to target,” the bank explained.
The rate boost follows a 100-basis-point surprise increase in July and half-point movements in April and June, making the current tightening effort one of the most vigorous in history. The overnight rate remained at a pandemic emergency low of 0.25 percent until the beginning of March.
The central bank reaffirmed its resolve to return consumer price rises to the 2% objective, and officials reaffirmed their concern that persistently high inflation poses a risk of becoming entrenched in expectations.
“For those asking, ‘Are we there yet?,’ the Bank of Canada replied, ‘Not yet,'” Canadian Imperial Bank of Commerce chief economist Avery Shenfeld said in a report to investors. The bank is indicating that “today’s disproportionate rate boost still falls short of where it feels rates will need to be to combat inflation”
While noting that headline inflation slowed in July due to a decline in gasoline prices, policymakers highlighted to a widening of price pressures and an increase in the stickiness of core inflation measures. Economic growth in the second quarter was slower than anticipated, but “extremely solid” indications of domestic demand, particularly consumption and corporate investment, were highlighted.
The 75-basis-point increase places Canada’s policy rate at its highest level since 2008 and raises borrowing costs to a level the Bank of Canada believes will begin actively cooling the economy. (The so-called neutral rate range, which neither boosts nor inhibits economic activity, is estimated to be between 2 and 3 percent.)
Additionally, Wednesday’s action will solidify Macklem’s status as one of his peers’ most hawkish central bankers.