ISTANBUL

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

The target for the overnight rate has been increased to 5%, with the bank rate now at 5.25% and the deposit rate climbing to 5%.

"Global inflation is easing, with lower energy prices and a decline in goods price inflation," the bank said in a statement. "However, robust demand and tight labor markets are causing persistent inflationary pressures in services."

Canada’s economy "has been stronger than expected, with more momentum in demand," it noted, adding that the bank expects consumer spending to slow in response to the cumulative increase in interest rates.

The Bank of Canada last raised interest rates by 25 basis points on June 7.

Inflation in Canada softened to 3.4% in May, falling significantly from 8.1% that was seen last summer.

Bank of Canada Governor Tiff Macklem said the central bank's monetary policy is working, but underlying inflationary pressures are proving more stubborn.

"We have made considerable progress in the fight against inflation," he told a press conference in Ottawa, Ontario.

"But even as headline inflation has come down largely as we forecast, underlying inflationary pressures are proving more persistent than we expected. Higher interest rates are needed to slow the growth of demand in the economy and relieve price pressures," he added.

Macklem stressed the Bank of Canada is trying to balance risks of under- and over-tightening monetary policy, and said: "If we don’t do enough now, we will likely have to do even more later. If we do too much, we risk making economic conditions unnecessarily painful for everybody."

He said the central bank expects economic growth to moderate and inflation to ease, but these are forecast to take longer than previously anticipated.

"As the global economy slows and higher interest rates work their way through the Canadian economy, we expect economic growth to average about 1% through the second half of this year and the first half of next year," he said.

Although many households have accumulated savings since the beginning of the coronavirus pandemic, some households have cut back on spending because inflation and higher rates have eaten into their budgets, according to Macklem.