For the first time since the beginning of the COVID-19 pandemic, the Bank of Canada raised its key interest rate goal.
On Wednesday, the central bank raised its benchmark rate by a quarter of a percentage point to 0.5 percent in an effort to combat inflation, which has reached its highest level since 1991.
The increased rate is expected to encourage the country’s major banks to raise their prime lending rates, raising the cost of loans like variable-rate mortgages tied to the benchmark.
The Bank of Canada cut its key interest rate to the emergency level of 0.25 per cent in March 2020 in an effort to help the economy weather the economic shock of the pandemic.
Since then, the economy has rebounded and inflation has jumped with the central bank saying today that it now expects inflation to be higher in the near-term than it previously thought.
The annual inflation rate in January of 5.1 per cent marked a three-decade high.
The Bank of Canada previously forecast annual inflation for the first quarter would be 5.1 per cent, but that was before Russia’s invasion of Ukraine sent oil prices higher and created new supply disruptions that will add to global price pressures.
The bank said persistently elevated inflation raises the risk that Canadians start to expect that inflation will stay higher for longer.
To keep inflation and expectations anchored, the bank said it plans to use interest rates to get inflation rates back to its two per cent target.
Senior decision-makers at the bank expect interest rates will need to rise further, although the timing and pace of those hikes will be tied to how the bank views the Canadian economy.
Statistics Canada said on Tuesday that the economy grew at a 6.7 percent annual rate in the last three months of 2021, which was higher than the Bank of Canada’s forecast.
Even with an Omicron-related setback that month that resulted in 200,000 job losses, the bank forecasts growth in the first quarter to be stronger than its previous projections in January.
According to the bank, the labor market slowdown should be short, and strong household spending should continue to grow when public health restrictions are eased, as some provinces have begun to do this month.
Nonetheless, the bank expressed concern over COVID-19 and the prospect of new versions.
Source_ The Canadian Press