The Bank of Canada has warned that it may act “more forcefully” if needed to bring inflation
down from a 30-year high.
As was widely expected, Canada’s central bank took another aggressive step and raised its
benchmark interest rate by 50 basis points for a second straight time yesterday (June 1). The
latest move brings its trendsetting overnight interest rate to 1.5%.
In a hawkish statement announcing the latest rate hike, the Bank of Canada said it remains
concerned about consumer price pressures and the economy becoming entrenched at elevated
inflation levels.
The aggressive language in the statement is fueling speculation that the central bank may adopt
a faster pace of monetary tightening. Yields on Canadian government bonds jumped higher on
the decision, with two-year notes trading at 2.8%, their highest level since 2008.
The central bank “is prepared to act more forcefully if needed to meet its commitment to achieve
the two per cent inflation target,” the Bank of Canada said in its statement. “The risk of elevated
inflation becoming entrenched has risen,” officials said, adding that they would use their tools to
return inflation to target and keep expectations “well-anchored.”
Markets were already pricing in another half-point increase at the Bank of Canada’s next policy
meeting on July 13, but bets have shot up for a fourth consecutive 50 basis point increase in
September and the terminal rate breaking past the 3% threshold.
Some analysts now say that a 75 basis point increase is also a possibility in July, even though
the central bank up until now has downplayed that idea.
The back-to-back 50 basis point increases are unprecedented since the central bank began
adjusting monetary policy at fixed decision dates in 2000.
But even with the latest half a percentage point increase, interest rates remain stimulative in
Canada. The central bank estimates that its policy rate needs to rise as high as 3% for
borrowing costs to no longer be inflationary.
