Bank of Canada announces 0.5% interest rate increase

The Bank of Canada has announced a 0.5% increase to its benchmark interest rate, a move that signals the central bank’s largest single rate hike for over two decades.

The decision, revealed at the Bank’s third scheduled interest rate announcement of the year, marks the second consecutive hike to its trendsetting rate after March’s quarter-point increase, and means the policy rate now sits at 1%.

In today’s announcement, the Bank indicated a “substantial upward revision” to its inflation outlook, citing Russia’s invasion of Ukraine, price increases in oil and other commodities, and supply disruptions as the main reasons behind that prognosis.

The hike was widely anticipated by mortgage experts and economists alike, with a consensus having developed in the leadup to the announcement that a half-point increase was in the cards to address those rapidly escalating inflation concerns.

The country’s February inflation figure stood at 5.7%, the largest year-over-year gain for more than 30 years, with the Bank admitting in its March statement that inflation was “expected to be higher in the near term” than it had projected at the beginning of the year.

Today, the Bank highlighted an “increasing risk” that elevated inflation in Canada could become “entrenched,” with CPI inflation expected to remain well above its 2% target throughout this year – and only return to more normal levels in 2024.

Recent weeks have seen the central bank’s deputy governor Sharon Kozicki hint at an oversized rate increase, saying it was “prepared to act forcefully” to curb ballooning inflation in Canada.

Earlier in March, Bank governor Tiff Macklem had refused to rule out a 0.5% hike down the line and noted that the institution had “considerable space” for rate increases in the remainder of 2022.

Prior to March’s increase, the Bank had not raised its policy rate since 2018 and stayed the course on a rock-bottom 0.25% benchmark throughout the first two years of the COVID-19 pandemic.

Scotiabank chief economist Jean-François Perrault told Canadian Mortgage Professional in the weeks leading up to the Bank’s latest announcement that it was “behind the curve” on inflation and had “some catching up to do” to tackle the issue.

“We think they’ve got some signalling to do that they take the inflation situation more seriously than their actions… suggest,” he said.

Attention will now turn to the Bank’s next policy rate announcement, scheduled for June 01, with a recent Reuters poll indicating the country’s largest banks expect another rate hike at that meeting – although any June increase isn’t anticipated to total more than 0.25%.