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Bank of Canada raises overnight rate half a point, largest hike in two decades

More rate-hikes expected throughout 2022
Bank of Canada governor Tiff Macklem

The Bank of Canada hiked its key rate by 50 basis points Wednesday morning in a race to tamp down on inflation, which has been hitting highs not seen since the early 1990s.

The overnight rate now stands at 1 per cent and economists widely expect about a half-dozen more rate-hikes to follow in the coming year, although not all of those rate-hikes are expected to be as high as 0.5%.

The central bank raised its key rate last month by 25 basis points – its first hike since 2018 – after inflation hit 5.7 per cent in February.

“Russia’s ongoing invasion of Ukraine is causing unimaginable human suffering and new economic uncertainty. Price spikes in oil, natural gas and other commodities are adding to inflation around the world. Supply disruptions resulting from the war are also exacerbating ongoing supply constraints and weighing on activity,” the Bank of Canada said in its announcement.

“These factors are the primary drivers of a substantial upward revision to the Bank’s outlook for inflation in Canada.”

There had been signs long before Russia’s invasion of Ukraine that inflation was becoming increasingly problematic.

Going into 2022, the overnight rate had been sitting at 0.25 per cent since the outset of the pandemic as the central bank aimed to inject cheap capital into the economy as the COVID-19 crisis unfolded. The federal government had also been earmarking billions of dollars to keep business activity charged amid the uncertainty.

At the same time demand for services such as tourist activities or in-person events had dropped during the pandemic, many Canadians found themselves sitting on additional savings and directed much of their dollars towards buying goods. That in turn put pressure on prices.

The global economy also bounced back significantly in 2021, putting further demand on labour markets after many had been laid off the year before. The additional demand for labour had put pressure on wage hikes as well.

“In Canada, growth is strong and the economy is moving into excess demand. Labour markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand and are able to pass on higher input costs by increasing prices,” the central bank stated in Wednesday’s announcement.

“Robust business investment, labour productivity growth and higher immigration will add to the economy’s productive capacity, while higher interest rates should moderate growth in domestic demand.”

More to come …

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