Bank of Canada to aggressively increase policy interest rate by 0.5%

The Bank of Canada is set to increase its policy rate to 1% on Wednesday.

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After increasing its policy rate by 0.25% in March, Canada’s central bank is set to increase it by 0.50% on Wednesday. 

The increase would bring the policy rate from 0.5% to 1%. 

12 economists surveyed by the Wall Street Journal said they believe the BoC will increase its policy rate by 0.5%, double the March increase. 

An increase of fifty basis points (0.5%) is considered more aggressive than the twenty-five basis points increase (0.25%), showing the Bank of Canada is concerned about the levels of inflation. 

In February 2022, Canada’s inflation climbed to 5.7%, its highest level in 30 years. 

“In February, Canadian consumer prices increased 5.7% year over year, up from a 5.1% gain in January. This was the largest gain since August 1991 (+6.0%). February marked the second consecutive month where headline inflation exceeded 5%”, the Statistics Canada release read. 

“Price increases were broad-based in February, pinching the pocketbooks of Canadians. Consumers paid higher prices for gasoline and groceries in February 2022 compared with the same month a year earlier. Shelter costs continued to trend higher, rising at the fastest year-over-year pace since August 1983”.

Energy costs increased more than other categories: “Canadian motorists paid 32.3% more at the pump compared with February 2021”. 

Increasing the policy rate will make borrowing more expensive to Canadian businesses and households, leading to lower consumption and reduced demand, which should in turn lower price levels to a level near normality. 

However, some economists argue that with the supply chain disruptions and the pent-up demand, central banks will have to raise interest rates to levels as high as 5% to curb inflation. 

Both the U.S. Federal Reserve and the Bank of Canada are dual-mandated central banks. While they have the mandate of keeping inflation within targets, they also have the mandate of keeping employment to healthy levels. 

While rising rates to higher levels may curb inflation, it also could disrupt the labor market. Central banks must balance both mandates in their policy decisions, but an increase of 50 basis points from the BoC would signal that the central bank is prepared to fight inflation.

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