On Wednesday, the Bank of Canada raised its benchmark interest rate by three-quarters of a percentage point, signaling that the key rate “will need to rise further” to combat high inflation.
The policy rate of the central bank is now 3.25 percent.
This is the fifth rate increase in 2022; Canada’s key interest rate was only 0.25 percent in January.
Markets and economists had largely predicted the 75 basis point increase, which came after a full percentage point hike in July.
The Bank of Canada raises interest rates in an attempt to cool the Canadian economy and discourage consumer spending demand, thereby dampening domestic fuel for inflation.
While second-quarter economic growth was slightly lower than expected, the central bank said in a statement that domestic demand remains “very strong” and the labor
market remains tight.
Passing the 3% mark is significant because it moves the bank’s policy rate beyond what it considers to be the “neutral range” and into territory where it is now actively suppressing economic growth.
The annual inflation rate fell to 7.6 percent in July, from 8.1 percent in June, as gasoline prices fell across Canada.
However, the Bank of Canada noted in its statement that inflation without gas prices increased and broadened last month, particularly in the services sector. The central bank’s core inflation rate rose to 5.5 percent in July, up from 5.0 percent the previous month.
“The longer this continues, the greater the risk that elevated inflation becomes entrenched,” the bank said, justifying its call for even higher rates.
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