Economy, Americas

Bank of Canada raises interest rates by 25 basis points

Russia's war on Ukraine still causes uncertainty, central bank says

Ovunc Kutlu  | 25.01.2023 - Update : 25.01.2023
Bank of Canada raises interest rates by 25 basis points

ISTANBUL

The Bank of Canada hiked interest rates Wednesday by 25 basis points, in line with expectations, as the central bank continues its monetary policy of quantitative tightening.

The target for the overnight rate has been increased to 4.5%, with the bank rate now at 4.75% and the deposit rate climbing to 4.5%.

"Global inflation remains high and broad-based. Inflation is coming down in many countries, largely reflecting lower energy prices as well as improvements in global supply chains," the bank said in a statement.

It added that Beijing lifting coronavirus restrictions has caused an upward revision to China's growth and poses an upside risk to commodity prices, while Russia's war on Ukraine continues to cause significant uncertainty.

The bank lightly revised up its estimates for the global economy and now expects it to expand around 3.5% in 2022, but then slow to around 2% in 2023 and 2.5% in 2024.

The Bank of Canada had raised interest rates by 100 basis points last July, its steepest hike since August 1998, in order to fight high inflation. It last made a rate hike of 50 basis points on Dec. 7.

Canada's annual consumer inflation rose 6.3% in December, easing from the 6.8% year-on-year gain in November.

Bank of Canada Governor Tiff Macklem said if economic developments evolve broadly in line with the bank's latest estimates, it will hold the policy rate at its current level.

"We have raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to the 2% target," he told a press conference in Ottawa, Ontario.

He noted that recent macroeconomic data suggests the bank's restrictive monetary policy is dampening household spending, particularly on housing and big-ticket items; however, economic growth and employment in the second half of last year came in stronger than expected.

"Excess demand in the economy has persisted, putting continued upward pressure on prices. Simply put, our overheated economy did not cool as much as we expected," he said. "Global supply chains, on the other hand, are resolving more quickly than expected. While they are not yet back to normal in Canada, we’ve seen substantial progress."

Macklem added that consumer inflation easing in December reflects lower global energy prices and some moderation in prices for durable goods as the supply side improved and overall demand softened.

"Lower gasoline prices are welcome, but prices of essentials like groceries and rent continue to increase too quickly," he said, adding: "We know it takes time for higher interest rates to work through the economy to slow demand and reduce inflation."

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