OTTAWA (Reuters) – The Bank of Canada (BoC) on Wednesday raised its main benchmark rate, the target for the overnight rate, to 4.75%, its highest level in 22 years, on concerns on the persistence of inflation above the 2% target due to the resilience of the Canadian economy.
The central bank had stopped raising rates since January, wanting to assess the impact of eight previous rate hikes that had taken the key rate to 4.50%, its highest level in 15 years, as part of the tightening cycle. fastest monetary policy in the BoC’s history.
The unexpected strength in consumer spending, the rebound in demand for services, the recovery in real estate activity and a tight labor market show that excess demand in the economy is more persistent than expected, the bank said. center in a press release.
Noting the rise in inflation in April, the BoC said uncertainty had grown that inflation could remain well above its 2% target.
In this context, the Governing Council considered that “monetary policy was not restrictive enough to restore the balance between supply and demand and ensure a sustainable return to the inflation target of 2%”.
The key rate last reached 4.75% in April and May 2001.
Money markets and analysts had been pricing in another rate hike this year, but many expected it to come in July. About two-thirds of economists polled by Reuters last week expected the central bank to hold rates until the end of 2023.
In April, inflation accelerated for the first time in 10 months to reach 4.4% year on year. Canada’s first-quarter gross domestic product (GDP) rose 3.1%, versus 2.3% forecast by the BoC.
The central bank said it would continue to assess economic indicators going forward to determine whether they are consistent with meeting the inflation target.
It has, however, abandoned the formula in its April monetary policy statement which stated that it “remains ready to raise the policy rate further” to achieve the inflation target, thus giving itself more freedom. for his next decision.
The Bank of Canada said it still expects inflation to slow to 3% this summer, but did not reiterate that it would slowly return to its 2% target by the end of the month. next year, as it had done in its last forecast in April.
(Steve Scherer report, Corentin Chapron, edited by Blandine Hénault)
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