The Bank of Canada is widely expected to raise its trendsetting interest rate another 50 basis
points, or half a percentage point, following its latest policy meeting today (June 1).
Markets and a majority of economists expect a second straight half-percentage point rate
increase that would take the central bank’s overnight rate to 1.5%. A third 50-basis-point
increase is expected in July.
The rapid interest rate increases are meant to help lower inflation that is currently at a 30-year
high. The Bank of Canada has reaffirmed its commitment to keep the country’s annual inflation
rate at its 2% target.
The latest rate decision, which is due at 10 a.m. EST today, involves a statement-only with no
new forecasts provided. Bank of Canada Deputy Governor Paul Beaudry will hold a news
conference on Thursday (June 2) to provide more insight into the bank’s thinking on inflation.
The rate statement will likely sound hawkish to justify the big increase and leave open the
possibility of a third half-point rate increase at the central bank’s next meeting scheduled for July
13.
Canada’s gross domestic product (GDP) grew at an annualized 3.1% in this year’s first quarter,
Statistics Canada reported earlier this week. The economic expansion was largely due to strong
growth in consumption and domestic demand.
At the same time, Canada’s unemployment rate hit a record low of 5.2% in April and job
vacancies are now at a record high, signs of an economy that’s run out of spare capacity.
Despite multiple hikes this year, interest rates remain stimulative. The Bank of Canada has
estimated that its policy rate needs to reach 2% to 3% for borrowing costs to no longer be
inflationary.
Rates that commercial banks charge customers are typically two percentage points above the
Bank of Canada’s benchmark overnight interest rate.
