Bank of Canada raises key interest rate again, signals pause in rate hikes

The Bank of Canada has raised its overnight rate by 25 basis points, moving its policy rate to 4.5 per cent from 4.25 per cent. If projections hold steady, the central bank has signalled a pause at its current rate, while it assesses the full impact of its hikes on the economy.

The Bank of Canada has raised its overnight rate by 25 basis points, moving its policy rate to 4.5 per cent from 4.25 per cent. If projections hold steady, the central bank has signalled a pause at its current rate, while it assesses the full impact of its hikes on the economy.

Excluding food and shelter, the central bank is seeing declines in inflation, due to decreases in gasoline and durable goods prices, according to the bank’s Monetary Policy Report released on Wednesday.

The current inflation rate sits at 6.3 per cent. The bank projects that number to decline to 3 per cent by mid-2023, with a return to its inflation target of 2 per cent in 2024.

This decline is due to improvements in global supply chains, with shipping costs returning to pre-pandemic levels. However, Canadian businesses continue to face challenges related to sourcing a wide range of supplies and hiring labour.

The Canadian labour market continues to be tight, with the unemployment rate sitting at a historic low of 5 per cent. This tight labour market has contributed to higher-than-normal wage growth, which the bank says poses a challenge to the inflation target.

“Unless a surprisingly strong pickup in productivity growth occurs, sustained 4 per cent to 5 per cent wage growth is not consistent with achieving the 2 per cent inflation target,” reads the report.

The bank says there is a risk the labour market might remain tighter than expected, feeding into higher costs in the services sector of the economy.