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Bank of Canada surprises with largest rate hike in 24 years

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Bank of Canada surprises with largest rate hike in 24 years

The Bank of Canada on Wednesday raised its main interest rate by 100 basis points to tame inflation, surprising markets and becoming the first G7 country to raise rates so aggressively in this economic cycle.

The central bank raised its policy rate to 2.5 percent from 1.5 percent, the largest hike in 24 years, and said further hikes were needed. Economists and currency markets had been expecting a 75 basis point gain.

“We’ve shown we’re prepared to be stronger. Even stronger today,” Gov. Tiff Macklem said at a news conference after the decision.

“Yes, a decision to add 100 basis points at a time is a very unusual move, and it does reflect the very unusual and exceptional situation we are in.”

Earlier, the central bank said excess demand, high inflation across industries and rising consumer expectations for continued price increases prompted the massive rate hike, raising the policy rate to the highest level since 2008.

“If this doesn’t reassure us that the Bank of Canada is serious about lowering inflation, I don’t know what will,” said Jay Zhao-Murray, market analyst at Monex Canada.

The Bank of Canada’s move comes after the Federal Reserve raised interest rates by 75 basis points last month.

“The Bank of Canada saw the Fed raise rates by 75 basis points and said ‘hold my beer,'” said Royce Mendes, head of macro strategy at Desjardins Group, noting the statement accompanying the “huge move” Hawkish language in .

soft landing

In its July forecast released on Wednesday, the Bank of Canada made it clear that it expects inflation to rise further and said it will remain around 8% for the next few months. Inflation in Canada hit 7.7% in May, near its highest level in 40 years.

The central bank now expects inflation to average 7.2% this year, falling to around 3% by the end of 2023 before returning to its 2% target by the end of 2024.

The Bank of Canada has been chasing high inflation for months, prompting a rare attack from critics and fueling fears that Canadians may lose confidence in their ability to control prices, leading to a price spiral.

“Our forecast is for a soft landing. As I said, the path to a soft landing has narrowed,” said Macklem, who was involved in the decision remotely after recovering from COVID-19. “It’s also a big reason why we’re taking stronger action today to raise rates earlier.”

Still, a 100 basis point move coupled with warnings of further rate hikes ahead could spook markets, economists said.

Doug Porter, chief economist at BMO Capital Markets, said: “I think the market is going to be nervous about the possibility of more upside surprises from a rate hike.”

slowing growth

The policy rate is now at the nominal neutral rate – between 2% and 3% – and monetary policy is neither stimulatory nor restrictive.

The Canadian dollar was up 0.5% at 1.2950, ​​or 77.22 US cents.

The bank also lowered its economic growth forecast for this year to 3.5% from an earlier estimate of 4.2%. It forecasts growth to slow to 1.8% in 2023 before rising to 2.4% in 2024.

The bank said the slowdown was “mainly due to the impact of high inflation and tightening financial conditions on consumption and household spending”.

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