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Bank of Canada hikes interest rate to 3.25%

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3.5% is highest rate since the global financial crisis

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The Bank of Canada delivered another supersized hike on Wednesday, raising the policy interest rate by 75 basis points to 3.25 per cent, the highest since the global financial crisis.

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The Bank also signalled it was continuing its quantitative tightening policy and more rate hikes would follow in an ongoing effort to stamp out decades-high inflation.

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Canada’s central bank warned of persistently high global inflation with pressures stemming from China’s ongoing COVID-19 shutdowns and volatile commodity prices in a statement accompanying the decision.

While the central bank noted inflation pressures had eased to 7.6 per cent from 8.1 per cent in July, core inflation continued to move up to a range of five to 5.5 per cent. The drop in the consumer price index was largely led by falling gasoline prices and the latest reading is still too hot for the economy to handle.

“The global and Canadian economies are evolving broadly in line with the Bank’s July projection,” read a statement from the Bank on Sept. 7, referring to the projections made in the Bank’s July economic outlook. “The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.”

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The Bank’s governing council determined that the policy rate will need to rise further since inflation is expected to remain elevated.

This fifth consecutive hike comes as the Canadian economy’s momentum is starting to slow, with growth coming in at just 3.3 per cent in the second quarter, a figure the Bank admitted was weaker than projected.

Rising borrowing costs have weighed on mortgage demand, easing the country’s housing markets that the Bank noted had grown unsustainably during the pandemic. With the aggressive path of rate hikes, the Bank said it expects the economy to continue to slow in the latter half of the year.

However, the central bank also pointed to stronger indicators of domestic demand as consumption grew by roughly 9.5 per cent and business investment rose nearly 12 per cent.

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The move was in-line with economist expectations as most were anticipating a hawkish 75 basis point hike. Leading up to the rate decision, Desjardins managing director and head of macro strategy Royce Mendes said in a note last week that as inflation begins to plateau, central bankers will need to remain vigilant.

“…Expect to see the effects of restrictive policy showing up more clearly this fall and winter, giving the central bank the greenlight to pause rate hikes,” Mendes wrote last week, adding that the economic impacts seen from rising rates so far were only the tip of the iceberg.

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With more rate hikes expected, Mendes said the Bank will have to drop any façade of a soft economic landing.

This latest increase brings the policy rate above the Bank of Canada’s theoretical neutral range of two to three per cent – a pace that should neither stoke nor restrict economic growth. The Bank began raising the policy rate in March and has since raised rates a total of 300 basis points in a series of outsized hikes.

The last time the policy rate was this high was in April 2008 when the Bank of Canada cut rates from 3.5 per cent to three per cent. The Bank of Canada will deliver its next policy rate decision and economic outlook report on Oct. 26.

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