The Bank of Canada has announced another hike in its key interest rate and has said this could be the peak of the current tightening cycle. Numbers-wise, the bank hiked its policy rate to 4.5 per cent in its first announcement of 2023, which is an increase of 25 basis points. For the record, this is the highest key rate by the Bank of Canada since the year 2007. This decision also marks the eighth consecutive time that the Bank of Canada has raised the cost of borrowing, thereby increasing the benchmark rate by a total of 4.25 per cent in the past year in an effort to tame inflation.
According to a statement by the central bank which came along with the hike announcement, the bank expects to hold the policy rate at its current level while it assesses the impact of its increases to date. Bank of Canada Governor Tiff Macklem said to reporters, 'We’ve raised rates rapidly, and now it’s time to pause and assess whether monetary policy is sufficiently restrictive to bring inflation back to its two per cent target'. The Bank of Canada Governor further added that this hold is a conditional one and will be monitored according to the development in the economy, also clarifying that more rate hikes could be in the offing to control inflation and bring it back to the two per cent target. It is to be noted here that the headline inflation has eased from a high of 8.1 per cent in mid-2022, to stand at 6.3 per cent in December 2022. The central bank also said in a set of projections that it is looking at inflation to 'decline significantly' in the months to come, and even reaching three per cent by mid-2023 and two per cent next year. At the same time, the Bank of Canada Governor clarified that these projections are hugely dependent on world economic factors like fuel prices. Even though the prices of goods have become better of late, the stickiness of inflation in the services sector is another risk to the Bank’s outlook according to the Governor.
He further added that the pause on interest rate hikes could end if the Bank starts to see an “accumulation of evidence” that inflation and other economic indicators aren’t heading the way policymakers expect.
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