Why the Bank of Canada is expected to raise its policy interest rate Wednesday morning - Toronto Star
With inflation at 3.1% and oil prices surging, most economists expected a rate hike — but some say the economy is too fragile.
Bank of Canada governor Tiff Macklem has warned inflation could become persistent if oil prices remain high.
The Bank of Canada raised its key interest rate on Wednesday for the first time since July 2023, ramping up its fight against inflation.
The bank delivered a 25 basis-point hike, bringing the policy rate to 2.5 per cent.
Speaking with reporters on Wednesday morning, Bank governor Tiff Macklem said that a rate hike was needed to reduce the risk of higher energy prices passing through to other goods and services.
“Higher interest rates aren’t going to immediately feel like they’re helping,” he said. “But what’s the best thing we can do for Canadian households and Canadian businesses? The best thing we can do is that we can get inflation down.”
With the ongoing war in the Middle East pressuring oil prices, central bankers are now forecasting inflation to rise to about 3.5 per cent by the end of this year. Inflation is only expected to return to the bank’s two per cent target in mid-2028.
Macklem said that there could be a need to raise the policy rate further, adding that policymakers will take future decisions one meeting at a time.
“We expect the bank to be patient from here,” Andrew DiCapua, economist with the Canadian Chamber of Commerce, said in an emailed statement. “It has shown it is willing to act on inflation, but there are serious doubts about the economy’s ability to absorb meaningfully higher borrowing costs.”
Wednesday’s decision, while expected by many economists and markets, is controversial — with some experts advising against a potentially premature hike given that the economy still appears to be hurting from U.S. President Donald Trump’s trade war.
Before the announcement, six of seven economists polled by the C.D. Howe Institute had called on the central bank to keep the rate at 2.25 per cent.
“We felt the case for patience was strong based on the latest data, with underlying inflation relatively contained, the labour market still on the softer side, modest economic growth, and an uncertain trade backdrop,” TD economist Marc Ercolao wrote in a note to clients after the decision.
But real estate insiders say the increase alone won’t have a huge impact on the market: “It’s not time to panic.”
