By Steve Scherer and David Ljunggren
OTTAWA (Reuters) -The Bank of Canada on Wednesday hiked its overnight rate to a 22-year high of 4.75%, and markets and analysts immediately forecast yet another increase next month to ratchet down an overheating economy and stubbornly high inflation.
The central bank had been on hold since January to assess the impact of previous hikes after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50% – the fastest tightening cycle in the bank’s history.
Surprisingly strong consumer spending, a rebound in demand for services, a pick-up in housing activity and a tight labor market show that excess demand in the economy is more persistent than anticipated, the central bank said in a statement.
Noting an uptick in inflation in April and the fact that three-month measures of core inflation remained stubbornly high, the Bank of Canada (BoC) said, “Concerns have increased that CPI inflation could get stuck materially above the 2% target.”
Given this backdrop, the governing council determined that “monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target.”
The Canadian dollar was trading 0.4% higher at 1.3350 to the greenback, or 74.91 U.S. cents, after touching its strongest level in four weeks at 1.3322. Money markets see more than a 60% chance of another rate hike in July and have fully priced in further tightening by September.
“We expect another 25 basis points coming in July,” said Derek Holt, vice president of capital markets economics at Scotiabank. “It is like a bag of chips, you open one and just can’t have one.”
The last time the rate hit 4.75% was in April and May 2001.
The BoC has no press conference scheduled on Wednesday, but Deputy Governor Paul Beaudry will speak and field questions from the media in British Columbia on Thursday.
Both money markets and analysts had seen a chance for a rate increase, but many thought one was more likely at the next meeting in July. About two-thirds of economists polled by Reuters last week expected the central bank to keep rates on hold through the end of 2023.
In April, annual inflation accelerated for the first time in 10 months to 4.4%. First-quarter GDP rose 3.1% – versus the 2.3% forecast by the BoC – and in April the economy is seen expanding 0.2%.
“The Canadian economy has shown remarkable resilience through 2023,” said Andrew Kelvin, chief Canada strategist at TD Securities, who also sees another hike in July. “To bring demand lower, which is the bank’s goal to achieve their 2% inflation target, we just simply need more tightening.”
The BoC said it would continue to assess economic indicators going forward to see if they “are consistent with achieving the inflation target.”
But it dropped language that was in the previous policy statement from April saying it “remains prepared to raise the policy rate further” to get inflation to target, leaving its next possible move more open ended.
The BoC said it still saw inflation slowing to 3% this summer, but it did not reiterate that it would slowly come down to its 2% target by the end of next year as it did when it made its last forecasts in April.
(Reporting by Steve Scherer and David Ljunggren; Additional reporting by Fergal Smith, Divya Rajagopal and Nivedita Balu in Toronto; Editing by Mark Porter)
