BoC raises rates to record high

The Bank of Canada (BoC) has made the decision to raise its key overnight interest rate by a quarter of a percentage point, bringing it to a 22-year peak of 5 percent. The central bank expressed concerns that excessive consumer spending could hinder efforts to achieve the 2 percent inflation target.

This move, which marks the second consecutive monthly increase, was widely anticipated by analysts and the markets. In June, following a pause lasting five months, the BoC raised the overnight rate, stating that monetary policy was not adequately restrictive.

In its recent statement, the BoC omitted the previous assertion that rates were insufficiently restrictive, but it revised its growth forecast for the year and extended the timeline for reaching the inflation target by six months to mid-2025.

Derek Holt, Vice President of Capital Markets Economics at Scotiabank, noted that members of the BoC’s governing council still appear open to further tightening, suggesting that they are simply taking a break for the summer.

Following the rate hike, Canadian money markets have increased the likelihood of another increase, with almost a 40 percent probability of a further hike at the next policy announcement in September.

The BoC expressed its concerns in its statement, stating, “With core inflation measures averaging between 3.5 percent and 4 percent over the past few months, and persistent excess demand, there are growing worries that consumer price inflation, as measured by the CPI, could significantly exceed the 2 percent target.”