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Bank of Canada unexpectedly hikes key rate one full point

Economists had widely expected the Bank of Canada would hike its key rate by 75 basis points
tiff macklem
Bank of Canada governor Tiff Macklem

Coming off two back-to-back hikes of 50 basis points earlier this year, the Bank of Canada has unexpectedly followed up with its highest rate-hike since 1998. 

The country’s central bank revealed Wednesday it was hiking its overnight rate by 100 basis points in a bid to tamp down on inflation, which shot up to 7.7 per cent in May.

Economists had widely expected the Bank of Canada would hike its key rate by 75 basis points. Instead, the central bank blew right on past that amid soaring inflation after its counterpart in the U.S., the Federal Reserve, hiked its own overnight rate 75 basis points last month.

“An increase of this magnitude in one meeting is very unusual,” Bank of Canada governor Tiff Macklem said in a press conference an hour after the rate decision was released, adding a rate-hike of 100 basis points reflects “very unusual economic circumstances.”

Macklem said boosting the rate so quickly is meant to prevent high inflation from becoming “entrenched.”

“We need to cool the economy,” he said.

“In terms of the surprise … we had indicated that we were prepared to be more forceful. Today was more forceful.”

After four consecutive rate hikes since the start of the year, the latest policy decision brings the overnight rate to 2.5 per cent.

The Bank of Canada said in its decision that inflation is higher and more persistent than it expected when it released an April policy report. It now expects inflation to remain around 8 per cent over “the next few months.”

“Labour markets are tight with a record low unemployment rate, widespread labour shortages and increasing wage pressures. With strong demand, businesses are passing on higher input and labour costs by raising prices,” the central bank said in its latest policy decision.

“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates by raising the policy rate by 100 basis points today.”

The Bank of Canada said it expects inflation to start to “come back down later this year” before easing to around three per cent by the end of 2023 and returning to a target of 2 per cent by the end of 2024.

“If this is indeed ‘front loaded’, then it may not be followed with another 1 per cent move in September and we could see something back in the 50-75 basis point range, although, that would still mean it's a supersized summer," TD senior economist James Orlando said in a note.

Rate-hikes so far this year have already had a notable impact on B.C.’s real estate industry.

Home sales across the province plummeted 35.7 per cent in June compared with a year earlier as mortgage rates have shot up amid ongoing rate-hikes in 2022, according to data from the B.C. Real Estate Association (BCREA).

“While a still growing economy and robust population growth point to strong demand, it is increasingly difficult to satisfy that demand at current interest rates,” BCREA chief economist Brendon Ogmundson said in a July 12 statement.

Carolyn Rogers, the Bank of Canada’s senior deputy governor, said recent homebuyers who’ve tapped variable rates are no doubt “being squeezed.”

“But that is a small segment of the population. Not to minimize the effect on that segment,” she said, adding housing prices have been “unsustainably high” for the last year.

Meanwhile, the value of the loonie jumped more than half a percentage point against the greenback to land at US$0.7718 prior by 8 a.m. PT.