The Bank of Canada decided to raise its benchmark interest rate by 0.5 percentage points, raising Canada's borrowing costs for the sixth time in a row this year while warning that economic growth will "stall" in the coming quarters.
This brought the interest rate to 3.75 percent for the first time since early 2008. Financial markets had been expecting a larger rate hike of 0.75 percentage points.
The central bank said that interest rates may need to rise higher to control decades of high inflation. But at the same time, the BoC made a more dovish statement than previous announcements, stating that higher borrowing costs are already weighing on the economy. It said in its latest economic forecast that there is about a 50 per cent chance of a recession in Canada in the next year.
"Future rate hikes will be influenced by assessments of how tighter monetary policy works to slow demand, how supply challenges are resolved, and how inflation expectations and inflation respond," the BoC said in a recent statement.
The decision surprised the market as Bank of Canada governor Tiff Macklem was clearly hawkish in his communications ahead of the rate announcement from the BoC so market players and private sector economists were expecting a bigger rate hike. Many assumed the bank would move aggressively to keep pace with the U.S. Federal Reserve. to avoid the decline of the Canadian dollar.
Higher rates make it more expensive for households and businesses to borrow money. Indirectly curbs demand for goods and services and slows the growth rate of consumer prices.
The housing market has been in a long slump, while consumer spending and business investment have weakened. Canadian exports are also weakening as major trading partners teeter on the brink of recession.
The bank cut its forecast for Canadian economic growth. It now expects 0.9 percent annual GDP growth next year, down from a previous estimate of 1.8 percent.
"GDP growth is then projected to slow to 0 percent and 0.5 percent through the end of 2022 and the first half of 2023," the BoC reported in its quarterly Monetary Policy Report, published today.
However, bank officials believe there is still "substantial excess demand in the Canadian economy," most evident in labor shortages and rising service prices.
