The overnight rate is now sitting at 2.5%, after the Bank of Canada (BoC) hiked interest rates a full percentage point today. The increase is higher than Scotiabank and other economic experts expected.
In a press conference this morning, the central bank’s governor Tiff Macklem, said “an increase of this magnitude is very unusual,” but it reflects the situation Canada is currently in.
Inflation is nearing 8%. That’s more than the BoC anticipated in April and the highest it’s been in about 40 years. Although global pressures like the war in Ukraine and supply disruptions have influenced inflation, strong demand for goods within Canada is now beginning to have a larger impact. Many key goods like food items and oil are experiencing around a 5% price increase.
“Demand needs to slow, so supply can catch up and price pressures ease,” said Macklem.
Today’s hike is the biggest interest rate jump in more than 20 years. Macklem said the new 2.5% overnight rate falls within a neutral range that neither stimulates nor restricts growth.
“The Bank of Canada’s surprise 100 basis point increase in interest rates underscores how challenging the inflation outlook is,” said Jean-Francois Perrault, Scotiabank’s Senior Vice-President and Chief Economist. “More interest rate increases are coming.”
In an earlier report by Scotiabank’s economic team, Perrault said that the Bank of Canada shouldn’t be acting alone to bring down inflation and that less government spending on goods and services could help lower it by reducing economic activity.
This is the BoC’s fourth interest rate hike this year. Macklem says the hope with July’s large 1% bump is that future increases will be smaller and inflation won’t become entrenched.
“If it does, it will be more painful for the economy — and for Canadians — to get inflation back down," said Macklem.
When asked about what this hike means for Canadians with variable rate mortgages, Macklem said most households are well poised to handle the higher borrowing costs and this hike is meant to cool demand, bring inflation down, and allow for a soft economic landing in the future.
The Bank of Canada expects to get inflation down to 3% next year and down to about 2% sometime in 2024.