Bank of Canada raises its overnight rate by 0.50% and promises more hikes

On Wednesday, the Bank of Canada raised its key lending rate by 0.50% marking its largest increase in 22 years. It also warned that rates will keep going up as it aggressively fights inflation that has reached a 30-year record high level.

The central bank led by Governor Tiff Macklem increased the overnight rate to 1%. According to Macklem, rates will return to what they consider the “neutral range” of 2-3%, and policy makers are ready to act “forcefully” if necessary.

In addition to it, the BoC stops buying government bonds this month in order to start reducing its balance sheet.

“The economy can withstand higher interest rates, and they are necessary,” – Macklem explained.

Such decisions point to an acceleration of what could probably be one of the most aggressive monetary tightening cycles in the history of the BoC. It means the Bank admits that it needs to exit from ultra-loose policy as fast as possible before inflation becomes completely uncontrolled.

In their new forecast, the policymakers expect the inflation to reach about 6% in the first half of this year, before going down to approximately 2.5% in the second half of 2023 and to 2% by the end of 2024.

“This isn’t the last half percent increase and I predict another one in June,” – says Derek Holt from Bank of Nova Scotia.

The officials don’t expect Canada’s economy to be negatively affected by the Russian aggressive war in Ukraine due to the nation’s commodities sector. Meanwhile, global inflationary pressures are expected to weaken. In case the latter forecast doesn’t come true, we may see more rate increases than initially planned.

At the same time, the BoC also raised the estimate for its neutral rate by 0.25% to about 2.5%, and it gives the Bank space for hikes.

The half percent increase was the first by a Group of Seven central bank since the pandemic.

For the average variable mortgage holder today’s rate hike means higher payment starting next month. For every $100,000 of the mortgage you owe it will be approximately $24 more per month.

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