By Steve Scherer, David Ljunggren
OTTAWA (Reuters), – On Wednesday, the Bank of Canada raised its key interest rate by 4.5%. This is the highest level in 15 year and makes it the first central bank to fight global inflation to announce that it will likely delay any further increases.
Analysts had expected a 25-basis point increase. To manage inflation, the bank raised rates at an unprecedented 425 basis points in 10 month to curb inflation. It did this at a record pace, exceeding analysts’ expectations. In December, it slowed to 6.3%, more than three times the target of 2%.
“We are turning the corner on inflation,” Tiff Macklem, Governor of Bank of Canada, spoke to reporters “We are still a long way from our target, but recent developments have reinforced our confidence that inflation is coming down.”
Canada’s approach to inflation has been consistent with that of the U.S. Federal Reserve. The Fed raised its target rate by 4.25 percent over the past year. At its Jan. 31-Feb. 1, policy meeting, the Fed will slow down its rate of hikes to signal that it is still fighting inflation.
Royce Mendes is director and head for macro strategy at Desjardins. He said Macklem would keep rates at least in the next few months with his team.
“As a result, we expect that this will be the final rate hike of this cycle,” He stated.
Macklem stated that the bank wanted to wait to determine if the rapid rises in interest rates had been effective in reducing excess demand and labor markets that have fuelled inflation.
“To be clear, this is a conditional pause,” He noted that the outlook was not perfect. “If these upside risks materialize, we are prepared to raise interest rates further.”
The bank’s quarterly Monetary Policy Report (MPR) included new forecasts and painted a picture showing an economy that could stall and tip into recession in the first half. This would bring inflation down to around 3% at the mid-year mark and then back to 2% by 2024.
In December, the central bank stated that future rate decisions would depend on data. A December employment report which was a huge success highlighted the upside risk of wage and price growth.
The Bank of Canada is expected to cut rates in October. However, the money markets see it as already cutting rates. Macklem rejected any discussion of cuts as premature.
‘TOO EARLY for CUTS’
“It’s really far too early to be talking about cuts,” Macklem, “The pause really is designed to give us time to assess whether we’ve raised interest rates enough to get inflation all the way back to target.”
The Liberal government could also benefit from a lower inflation rate. Justin Trudeau is accused by the Conservative Party, the main opposition party, of inflating prices through his excessive spending.
“We’re not going to do things that will further contribute to the Bank of Canada’s need to fight inflation,” Trudeau spoke to reporters in Hamilton, Ontario. The government will present its budget in spring. It has also promised to invest in clean tech and healthcare.
Pierre Poilievre (Conservative leader) said in Ottawa that the most recent rate hike was a “sucker punch” Trudeau
“The cost of government is driving up the cost of living,” He told reporters in Ottawa. Poilievre reiterated his demand that Macklem be fired, citing the fact that Macklem had also failed to handle the COVID crisis.
Canadian dollars traded 0.3% lower at 1.3410/greenback (or 74.57 U.S.cents). The 2-year yield fell nearly 6 basis points, to 3.596%.
(Additional reporting by FergalSmith and Maiyakeidan in Toronto, and Ismail Shakil Ottawa; Editing done by Paul Simao and Mark Porter; Diane Craft
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