Bank of Canada raises policy rate to highest level since 2001
The Bank of Canada raised its overnight rate by 25 basis points to 4.75 per cent on Wednesday, its first increase since pausing hikes in January.
The central bank’s key interest rate has not been this high since April 2001.
Several factors led to the decision to raise the rate, including economic growth in Canada. Gross Domestic Product (GDP) exceeded expectations in the first quarter of this year, growing by 3.1 per cent.
The Bank of Canada says demand in the economy has rebounded, with strong consumer spending and an uptick in housing market activity.
“Overall, excess demand in the economy looks to be more persistent than anticipated,” reads its release.
In April, inflation increased for the first time in 10 months to 4.4 per cent. The bank still expects inflation to decline to three per cent by this summer, but concerns remain that inflation could get stuck above the two per cent target without intervention.
"What (this hike) tells us is the bank is determined to get inflation well under control," former Liberal Finance Minister John Manley said. "That means back to the target range of one to three per cent. It's not going to be satisfied with inflation continuing in the four and five per cent range."
The move will likely have at least a short-term impact on Alberta's booming real estate market.
"Expect to see housing prices start to level off or see a slight decline in the next month or so," RatesDotCA's Victor Tran said. "We're seeing some of the highest interest rates in the past 15 years with some of highest property values. So those combined together just makes everything unaffordable."
Tran is just one expert predicting another hike before September.
The next scheduled rate announcement is expected on July 12, 2023.