The Bank of Canada raises interest rates to a 22-year high, and more increases are expected

OTTAWA, June 7 (Reuters) – The Bank of Canada raised its overnight rate to a 22-year high of 4.75% on Wednesday, with markets and analysts immediately predicting another hike next month to bring down an overheated economy and stubbornly high inflation .

The central bank had been on hold since January to assess the impact of previous increases after raising borrowing costs eight times since March 2022 to a 1[ads1]5-year high of 4.50% – the fastest tightening cycle in the bank’s history.

Surprisingly strong consumer spending, a pick-up in demand for services, an increase in housing activity and a tight labor market show that excess demand is more persistent than expected, the central bank said in a statement.

The Bank of Canada (BoC) noted a rise in inflation in April and the fact that its three-month target for core inflation remained high, saying that “concerns have increased that CPI inflation could move significantly above the 2% target.” “

Given this backdrop, the Board determined that “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”

The Canadian dollar traded 0.4% higher at 1.3350 to the dollar, or 74.91 US cents, after touching its strongest level in four weeks at 1.3322. Money markets see a 60% chance of another rate hike in July and have fully priced in further tightening by September.

“We expect another 25 basis points to come in July,” said Derek Holt, vice president of capital markets economics at Scotiabank. “It’s like a bag of chips, you open one and just can’t have one.”

The last time the rate reached 4.75% was in April and May 2001.

BoC Deputy Governor Paul Beaudry will speak and take questions from the media in British Columbia on Thursday.

CRISIS VS SOFT LANDING

The leader of Canada’s main opposition Conservative Party, Pierre Poilievre, spoke to his parliamentary caucus. He accused Liberal Prime Minister Justin Trudeau of fueling inflation with deficit spending and taking the country toward “a full-scale financial crisis.”

However, Canada’s Finance Minister Chrystia Freeland said the economic recovery from the COVID-19 pandemic and Russia’s invasion of Ukraine has created price increases.

No country is “better positioned for a soft landing than Canada,” she told reporters. “We are very close to the end of this difficult period and a return to low, stable inflation and strong, steady growth.”

In April, annual inflation accelerated for the first time in 10 months to 4.4%. GDP in the first quarter rose 3.1% – against the 2.3% forecast from the BoC – and in April it is seen that the economy is growing by 0.2%.

“The Canadian economy has shown remarkable resilience through 2023,” said Andrew Kelvin, chief Canada strategist at TD Securities, who also sees another rebound in July. “To bring down demand, which is the Bank’s aim to meet their 2% inflation target, we just need more tightening.”

The BoC said it will continue to assess economic indicators going forward to see if they “are consistent with achieving the inflation target.”

But it dropped language that was in the previous policy statement from April and said it “remains prepared to raise the key rate further” to get inflation to target, leaving the next possible move more open-ended.

The BoC said it still saw inflation slowing to 3% this summer, but it stopped short of repeating that it would slowly come down to its 2% target by the end of next year, as it did when it released its latest forecasts in April.

Reporting by Steve Scherer and David Ljunggren; Additional reporting by Fergal Smith, Divya Rajagopal and Nivedita Balu in Toronto; Editing by Mark Porter

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