The announcement was expected, even feared. It is now official. The Bank of Canada is raising its key rate by 0.25 percentage points, bringing it to 5% and not ruling out the need to raise it again next September.
This is the tenth increase in the key rate since March 2022, when it was still at its pandemic low of 0.25%. “This kind of decision is not easy to make,” Bank of Canada Governor Tiff Macklem said at a press conference. “We discussed the possibility of not changing the rate and gathering more information. In the end, we judged that there were more risks than advantages in delaying our action,” he explained.
Right now, “it’s clearly too early to talk about lower interest rates,” Mr. Macklem later said during a question period with reporters.
The Bank of Canada justifies this new tightening by the fact that demand has shown stronger dynamism than expected, and that inflation is not yet under control.
“Consumption growth was surprisingly high, reaching 5.8% in the first quarter,” it noted in a statement. And even though the headline consumer price index (CPI) has largely slowed since its pandemic peak—from 8.1% in June 2022 to 3.4% last May—the underlying inflationary pressures or “fundamentals” remain too strong, signals the central bank.
She points out that it will take longer than expected before inflation returns to its target of 2.0%. Annual inflation is expected to stagnate around 3% for the next year, before gradually declining to 2% by mid-2025.
Possible further increase in September
The Governor of the Bank of Canada has not ruled out the possibility of additional rate hikes to curb inflation.
“We are trying to balance our monetary recovery well. If new data indicate that more needs to be done, we are ready to raise the key rate further. But we don’t want to do more than necessary, ”said Tiff Macklem.
“If we don’t do enough now, we’ll probably have to do more later. And if we do too much, we risk creating an unnecessarily difficult economic situation for everyone,” he explained.
The Governor of the Bank of Canada acknowledged that rising interest rates “create a difficult situation for a large part of the Canadian population”. However, several factors continue to support household spending, he said.
In particular, Canadians retain some confidence in the job market, which remains very tight despite some signs of easing. “The unemployment rate has increased slightly, but remains at a historically low level, and wage growth is between 4% and 5% over several months, which is too high to ensure price stability,” said Mr. Macklem.
The governor added that it was possible that the savings accumulated by households during the pandemic could still serve as a “cushion” and allow Canadians to support their spending.
The Bank of Canada’s next key rate announcement will take place on September 6.
