To combat inflation, the Bank of Canada increased its benchmark interest rate by 100 basis points on Wednesday, stunning the markets and becoming the first G7 nation to do so during the current economic cycle.
The central bank announced that more rate increases would be required as it increased its policy rate from 1.5 percent to 2.5 percent, the highest rate increase in 24 years. A 75-basis point hike was anticipated by economists and the financial markets.
“We had made it clear that we were willing to use additional force. After the ruling, Governor Tiff Macklem said at a news conference that today was “more aggressive.”
Prior to the massive increase, the central bank claimed that excessive demand, high inflation that was felt across sectors, and increased consumer expectations of ongoing price increases were to blame. As a result, the policy rate rose to its highest level since 2008.
Jay Zhao-Murray, a market analyst at Monex Canada, said: “If this doesn’t get us back into the idea that the Bank of Canada is serious about keeping inflation down, I don’t know what would.” The Bank of Canada’s action comes after the U.S. Federal Reserve raised interest rates by 75 basis points last month.
Royce Mendes, head of macro strategy at Desjardins Group, noted harsh wording in the statement that preceded the “colossal move,” saying “The Bank of Canada saw the Fed boost 75 bps and shouted ‘Hold my beer’.” The unexpected action by the central bank boosted the Canadian currency, which by late afternoon was trading up 0.4 percent at 1.2975 to the US dollar. The leading Canadian stock index fell to its lowest level since March 2021 before climbing back up to trade.
The unexpected action by the central bank boosted the Canadian currency, which by late afternoon was trading up 0.4 percent at 1.2975 to the US dollar. The leading Canadian stock index fell to its lowest level since March 2021 before climbing back up to trade at par. The bank also decreased its prediction for this year’s economic growth from 4.2 percent to 3.5 percent. In 2023, growth was forecast to fall to 1.8 percent before increasing to 2.4 percent in 2024.
According to the bank, the impact of high inflation and tighter financial conditions on consumption and household spending is the primary cause of the slower growth.
Mahnur is MS(development Studies)Student at NUST University, completed BS Hons in Eng Literature. Content Writer, Policy analyst, Climate Change specialist, Teacher, HR Recruiter.
