Bank of Canada raises key interest rate to 4.75% to combat inflation

In an effort to quell inflation, interest rates are on the rise again.

The Bank of Canada announced today (June 7) that it increased its target for the overnight rate or key rate to 4.75 per cent an increase of 25 basis points  — the highest it’s been since April 2001.

The key policy rate, also known as the target for the overnight rate, is how much interest the Bank of Canada wants commercial banks to charge when lending each other money overnight to settle daily balances.

The increase follows the hike to 4.5 per cent in January, which was the highest the Bank of Canada’s key rate has been since 2007.

Globally, consumer price inflation is coming down, largely reflecting lower energy prices compared to a year ago, but underlying inflation remains stubbornly high, the Bank of Canada noted in a press release.

The Bank of Canada signalled it is responding to global economic conditions.

“While economic growth around the world is softening in the face of higher interest rates, major central banks are signalling that interest rates may have to rise further to restore price stability,” the release states.

In the United States, the economy is slowing, although consumer spending remains surprisingly resilient and the labour market is still tight. Economic growth has essentially stalled in Europe but upward pressure on core prices is persisting. Growth in China is expected to slow after surging in the first quarter.

Financial conditions have tightened back to those seen before the bank failures in the United States and Switzerland.

However, Canada’s economy was stronger than expected in the first quarter of 2023, with GDP growth of 3.1 per cent.

People are buying goods and services, the housing market has picked up and the labour market remains tight.

“Overall, excess demand in the economy looks to be more persistent than anticipated,” the release states.

But inflation on goods and services continues to rise despite lower energy prices.

“Based on the accumulation of evidence, Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target,” the release states.

The Bank of Canada’s Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI (consumer price index) inflation.

“In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target,” the release states. “The Bank remains resolute in its commitment to restoring price stability for Canadians.”

The full Bank of Canada statement can be found here.