Bank of Canada hikes key rate by half percentage point, signals possible pause

The central bank has been raising interest rates rapidly to slow the economy and bring inflation down

CITYnews halifax \ Canadian Press

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OTTAWA — The Bank of Canada hiked its key interest rate by half a percentage point Wednesday to 4.25 per cent – the highest it’s been since January 2008.

After its seventh consecutive increase since March, the central bank signaled it may pause its aggressive rate hike cycle.

“Looking ahead, [the] governing council will be considering whether the policy interest rate needs to rise further to bring supply and demand into balance and return inflation to target,” the Bank of Canada said in a news release.

That language is a marked departure from previous announcements where the bank said more rate hikes should be expected.

The central bank has been raising interest rates rapidly to slow the economy and bring inflation down.

In its news release, the Bank of Canada said there’s “growing evidence” that higher interest rates are restraining demand in the economy.

“Consumption moderated in the third quarter, and housing market activity continues to decline,” the central bank said.

The Bank of Canada said economic data released since its October interest rate decision supports its forecast that growth will stall through the end of the year and into the first half of 2023.

At the same time, it said inflation is still too high and short-term inflation expectations remain elevated.

In October, the annual inflation rate was 6.9 per cent, well above the Bank of Canada’s two per cent target. However, economists have noted the three-month annualized inflation rate has dropped to below four per cent, suggesting inflation is headed in the right direction.

Forecasters were split on whether the Bank of Canada would opt for a quarter or half percentage point rate hike ahead of Wednesday’s decision. Market watchers were also unsure if the central bank would continue raising interest rates in the new year.

The Bank of Canada will announce its next interest rate decision on Jan. 25.

This report by The Canadian Press was first published Dec. 7, 2022.

The Canadian Press