The Central Bank of Canada decided to raise interest rates by a quarter of a percentage point and gave an indication that there would be more hikes. This measure is to offset the rising level of inflation.
Policymakers led by Governor Tiff Macklem raised the overnight benchmark to 0.5% on Wednesday’s results in Ottawa in line with expectations. Policymakers also say they expect to increase borrowing costs even more because of high inflationary pressures, but refrain from starting their government bond purchases.
The rate move is the first increase in borrowing costs since 2018. The market is betting the Bank of Canada’s overnight policy rate will hit as high as 1% by June, and 1.75% by the end of next year.
"As the economy continues to grow and inflationary pressures remain high, the Governing Council expects interest rates to continue to rise," the official said in a statement.
The central bank is aware that Russia's aggression on Ukraine has created "a major source of new uncertainty." This and the risk of inflation can hamper economic growth.
However, price pressures are currently a major concern. With inflation already ‘far exceeding’ the bank’s 2% target and price increases becoming more widespread, policymakers are of the view that risks have the potential to increase.
Despite some speculation the Bank of Canada is shrinking its balance sheet, the central bank has chosen to pursue a policy of maintaining its government bond holdings for the time being.
