Bank of Canada raises key interest rate, making the cost of borrowing more expensive

The Bank of Canada has raised its policy interest rate again, making the cost of borrowing more expensive.

The Bank of Canada has raised its policy interest rate again, making the cost of borrowing more expensive.

The 25 basis points hike brings the Bank’s overnight rate to 5 per cent, the highest it’s been since 2001.

In its Monetary Policy Report, the Bank of Canada says the rate increase was necessary to help slow economic growth and reduce core inflation. Three-month rates of core inflation have been higher than the Bank’s expectation hovering around 3.5 per cent to 4 per cent since September 2022.

“The stubbornness of core inflation in Canada suggests that inflation may be more persistent than originally thought,” the Bank’s Monetary Police Report states.

Since the Bank of Canada started raising rates in March 2022 inflation has dropped from a peak of 8.1 % last summer to 3.4 % in May.

While the Bank acknowledges inflation has been declining due to falling energy prices, easing supply constraints and interest rate hikes, it predicts inflation will remain elevated around 3 per cent over the next year. The Bank says economic growth isn’t slowing as quickly as expected, citing more momentum for demand and stronger than anticipated consumer spending in the first quarter of 2023.

The central bank’s mandate is to keep inflation around 2 per cent and its forecasters are currently predicting inflation will return to that 2 per cent level in the middle of 2025, two quarters later than previously projected.