Bank of Canada hikes rates, becomes first major central bank to signal pause

The bank has raised rates at a record pace of 425 basis points in 10 months to tame inflation. PHOTO: REUTERS

OTTAWA - The Bank of Canada on Wednesday hiked its key interest rate to 4.5 per cent, the highest level in 15 years, and became the first major central bank fighting global inflation to say it would likely hold off on further increases for now.

The 25-basis-point increase was in line with analysts’ expectations. The bank has raised rates at a record pace of 425 basis points in 10 months to tame inflation, which peaked at 8.1 per cent and slowed to 6.3 per cent in December, still more than three times the bank’s 2 per cent target.

The members of the Governing Council “clearly have enough confidence that the tightening currently in place is already slowing the economy that they are comfortable they won’t need to lift rates further in most scenarios,” said Andrew Kelvin, chief Canada strategist at TD Securities.

Growth this year will be stronger than had been projected in October but is expected to stall through the first half, the bank said in its quarterly Monetary Policy Report (MPR), which includes new forecasts. Inflation will fall to about 3 per cent around the middle of this year, and reach target next year.

If the economy evolves as forecast, “Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” the statement said.

“Governing Council is prepared to increase the policy rate further if needed to return inflation to the 2 per cent target,” the statement said.

The central bank had said in December that future rate decisions would be data dependent, and a blowout December employment report, released earlier this month, highlighted the upside risk to wage and price growth.

“The Bank of Canada is back to using forward guidance,” said Royce Mendes, director and head of macro strategy at Desjardins. “That likely ensures a pause in the rate-hiking cycle for at least the next few months.”

While food and shelter cost increases are still weighing on households and headline inflation is still high, the bank said in its MPR that “three-month CPI inflation has fallen to about 3.5 per cent, suggesting a significant slowdown in inflation in coming months.”

The Canadian dollar weakened to 1.34 per US dollar, down 0.2 per cent on the day, after the rate hike. Canada’s 10-year yield eased 6.5 basis points to 2.792 per cent. REUTERS

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