The Bank of Canada on Wednesday decided to raise its key overnight benchmark rate to 4.75%, a 22-year high, amid growing concerns that inflation could be stuck well above its 2% target amid strong economic growth.
The central bank has held off on rate hikes since January to assess the impact of previous hikes after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50%, the fastest tightening cycle in the bank's history.
Surprising consumer spending, a recovery in demand for services, an increase in housing activity and a tight labor market indicate that excess demand in the economy is persistent compared to expectations.
Noting the rise in inflation in April and the fact that the three-month measure of core inflation has been running as high as 4% for several months, the Bank of Canada (BoC) said, "Concerns have grown that CPI inflation could hover above the 2% target."
Based on this expansion, the governing council decided that "monetary policy is not restrictive enough to bring supply and demand back into balance and return inflation sustainably to the 2% target."
The Canadian dollar strengthened 0.5% to 1.3330 against the US dollar after the announcement. Money markets see a nearly 60% chance of another rate hike in July and have fully priced in by September.
