Bank of Canada raised its overnight rate to 4.75% reaching the highest level in 22 years. Should we expect more increases?

On Wednesday, the central bank didn’t follow the general forecast and raised its key lending rate by 0.25% to 4.75%, saying that the national economy keeps running too hot.

Governor Tiff Macklem’s decision led the overnight lending rate to the highest level since 2001. Only one in five economists in a Bloomberg poll had expected such a move, while markets had put the odds at almost 50%.

After announcing a conditional pause in January, policymakers have cautioned that more rate hikes may be necessary. And although some Canadians are already feeling the impact of higher borrowing costs, the Bank of Canada’s move means the officials are concerned about economic momentum not slowing down without another increase.

“Monetary policy was not restrictive enough to balance supply and demand and return inflation to the target level of 2%,” – the BoC said, pointing to an “accumulation of evidence” including stronger-than-expected first quarter GDP, an increase in inflation and a recovery in real estate market activity.

There was not much information on the future of interest rates, which means the Bank isn’t sure yet whether it will be only one hike or the beginning of another cycle. Officials plan to study how excess demand, inflation expectations, wage growth, and corporate pricing behavior will change.

Amid the Bank’s unexpected rate increase, economists are predicting more hikes.

According to Earl Davis from BMO Global Asset Management, this increase means that more hikes are on the way.

“When the central bank starts raising, it’s not just one increase, it’s several of them,” – he explained. “Since the Bank raised the rate today, I expect one more or even two before the next pause.”

Steven Ranson, president and CEO of Home Equity Bank, shares Davis’ opinion.

“There’s probably another 0.25% rate increase coming maybe not in July, but probably in September if inflation doesn’t come down, and it doesn’t seem like it is,” – he noted. “Returning to 2% is difficult and it looks like we are a long way from that.”

Josh Nye, a senior economist at the RBC, also predicts more hikes.

“In our opinion, if the BoC was ready to act, they would be more than one increase: if 4.50% is not enough, 4.75% will hardly be,” – he said.

However, now everyone is sure more increases are coming.

“A lot will depend on the data if we’re talking about a July meeting. There are several reports coming that could affect the Bank’s decision,” – noted David Doyle, head of economics at the Macquarie Group.

The next rate meeting is scheduled for July 12.

To discuss implications of the latest interest rate hike and strategies for the new home purchasers and existing mortgage holders, join us this Saturday, June 10 at 7:30am for the live interview on Radio Show “Intersection” on FM 88.9, watch live stream at Radio NOVA Toronto channel or listen online at radionovatoronto.ca.