The Bank of Canada is raising its benchmark interest rate 0.75 per cent from 0.5 per cent, the first increase in seven years.
The central bank made the decision to hike rates to close the gap between Canada’s monetary policy and future inflation, according to a news release. “Recent data have bolstered the bank’s confidence in its outlook for above-potential growth and the absorption of excess capacity in the economy. The bank acknowledges recent softness in inflation but judges this to be temporary.”
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According to the bank, increased household spending has fueled Canada’s economy and, while strong growth in the first quarter of 2017 is expected to moderate, it’s still expected to remain above potential. The bank also cited a growth in the goods and services sector, rising employment and wages, and exports as factors that will likely contribute to growth in Canada’s gross domestic product.
And, despite the fact that inflation has eased in recent months, the bank predicts it will return to close to two per cent by the middle of 2018.
The central bank hasn’t changed its benchmark rate of 0.5 per cent since it first cut rates in July 2015 to address the decline in Canada’s economy. The next scheduled rate announcement is Sept. 6.