On Wednesday, in an attempt to suppress the growing inflation, the Bank of Canada (BoC) increased its benchmark interest rate by an entire percentage point, throwing onlooker markets into a dire state of shock with its milestone rate hike since the year 1998.
The central bank made a move to hike its policy rate to 2.5% from the previous 1.5% and had made its intentions to add more hikes in the future quite clear. This decision was more out-of-the-blue than the 75-basis point hike imagined by the monetary markets and several economists.
The bank had issued a statement saying that with the excess demand they were facing, inflation only getting worse, and countless consumers, corporations, and businesses forecasting the inflation to last through a protracted period—the Governing Council had come up with the idea of distributing the road to greater interest rates. It is required to grow, anyway, according to the bank.
This situation will mark it as the first and currently, only G7 central bank to do the deed and increase rates by 100 basis points in this period.
The precedent was the rate hike by the U.S. Federal Reserve in June, where it dropped a double-digit thunder of 75 basis points.
The Head of Macro Strategy at Desjardins Group, Royce Mendes, had commented that the Bank of Canada had seen the Fed’s move of 75 bps and had taken the throne in an aloof manner, after observing the energy conveyed in the statement that was given with this massive step.
In it, BoC increased its inflation foreshadowing for the near-term and highlighted that it saw profit earnings jump on the chart, averaging about 8% in what’s left of the year.
In May, the Canadian inflation rate had flagged a 40-year high by touching the 7.7% threshold.
This year, it may average around 7.2%, maybe stumbling around 3% by December next year and then up to the 2% finishing line by December 2024.
This colossal hike had the Canadian dollar hurdling high, and it was intended to sort of pave the way and gain authority of sky-high interest rates, as a way of battling inflation according to the bank. BoC had made a mistake of undermining just how severe the inflation would be in the initial stages, but now that they have had a taste—they are determined to reverse the losses to a certain extent.
However, according to economists, ideal as it is this sudden thrust with the assurance that more followed by closely is enough to stir some commotion in the markets.
BMO Capital’s Chief Economist, Doug Porter, had clarified that the market is indeed sensitive to such shocking movements (no matter how well intended it may be), so the probability of more surges in rates might have them wary and guarded.
Nevertheless, Canadian economic health is paced slowly in 2022, with GDP—the gross domestic product reaching a promising 3.5% and then sliding down to 1.8% next year.
This reduced snail-slow growth is mostly due to the hit of inflation and the stricter financial drawbacks on consumer needs and household budgets, according to BoC.
It has a goal of cushioning the impact, hopefully evading the recession over at least three more years from now.
The interest rate spike decision was led by Tiff Macklem, the Governor who was suffering from COVID-19 and took a while to bounce back but his involvement solidified Canada’s resolution to fend against these uncertain times in the global economies, the bank revealed.