Canada targets runaway inflation with interest rate hike

TRENTON, Canada

The Bank of Canada (BOC) raised its interest rate by a half percentage point Wednesday, targeting inflation and raising the cost of borrowing, including for mortgages.

It places the rate at 1% from a rate of just above 0 since the pandemic hit in March 2020, and marks the steepest jump since 2000.

The rate determines the interest rate lenders like banks and mortgage companies charge consumers and businesses.

The increase is seen as the BOC prescription for the high cost of housing in Canada. Lowering the cost was a high priority in the government of Prime Minister Justin Trudeau’s budget presented earlier this month. The cost of homes has almost doubled to an average of $816,000 in February, up 20% from the previous month and almost double the cost of a few years ago.

The bank said Russia’s military operation in Ukraine has fed inflation by increases in the cost of energy -- Russia exports oil and natural gas -- and other commodities.

The increase in the rate was expected because inflation has ballooned to 5.7%, higher than the BOC estimated.

Meanwhile, the Canadian economy has come roaring back to life as it shakes off the effects of the two-year pandemic. Employment figures are sky-high, as are the prices for consumer goods like dairy products and beef. Housing is in short supply, as well.

The bank also warned that interest rates may rise again.

“A broad set of measures suggests that economic slack has been absorbed and that the economy is starting to operate beyond its productive capacity,” it said.

“With the economy moving into excess demand and inflation persisting well above target, the governing council judges that interest rates will need to rise further,” according to the BOC. “There is an increasing risk that expectations of elevated inflation could become entrenched."