Bank of Canada Raises Key Interest Rate to 4.75%

The Bank of Canada raised its key interest rate on Wednesday to 4.75 per cent, saying underlying inflation continues to sit at "stubbornly high" levels.

The quarter-point bump is the first increase since January, when Canada's central bank signalled it would pause to assess the moves it had already taken to tame inflation. The Bank of Canada has now raised its benchmark lending rate nine times since the beginning of 2022.

“Today's increase is hardly shocking given recent data flow, but was only expected by a handful of analysts," said RBC Senior Economist Josh Nye in a report. Nye pointed to data such as stronger-than-expected first-quarter GDP growth, a surprising uptick in inflation in April, ongoing low unemployment and a Canadian housing correction that "appears to have run its course."

"Overall, excess demand in the economy looks to be more persistent than anticipated," the central bank said in its rate-decision statement. It added that the rate hike reflects “our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the two per cent target."

The Bank of Canada aims to keep inflation at the two per cent midpoint of a target range of one to three per cent. Headline inflation in Canada accelerated slightly in April to 4.4 per cent from 4.3 per cent in March. The central bank said Wednesday that, with three-month measures of core inflation running in the 3.5 to four per cent range for a number of months and excess demand persisting, it has increased concerns that inflation “could get stuck materially above the two per cent target."

The Bank of Canada also said quantitative tightening "is complementing the restrictive stance of monetary policy and normalizing the Bank's balance sheet." The Bank of Canada announced a year ago that it would begin quantitative tightening, or QT, meaning it would stop purchasing Government of Canada bonds in order to let its balance sheet shrink over time. QT is the opposite of quantitative easing, or QE, a tool the bank turned to during the pandemic to help encourage spending and investment.

The next rate decision is scheduled on July 12. “It's an unusually short five weeks until the July rate decision, but that period is packed with key releases," said Nye, including two employment reports, another inflation reading, gross domestic product data and the second quarter Business Outlook Survey.

“The onus is clearly on that data to soften broadly to preclude another rate hike," Nye said.

For more on interest rates, inflation and central banks, check out:

What Rising Interest Rates Can Mean for Investors

What is Inflation and How Does it Affect Investors?

A Bank With A Mission: How Central Banks Shape the Economy and Your Money