In a move widely anticipated by the financial sector, the Bank of Canada is increasing its target for the overnight rate to 0.5 per cent.
“Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards,” said the bank in a press release. “The bank will use its monetary policy tools to return inflation to the two per cent target and keep inflation expectations well-anchored.”
The decision to increase interest rates follows the arrival of economic data broadly in line with the central bank’s January projections for Canada’s economic performance during the fourth quarter of 2021. Overall, the economy exceeded the bank’s expectations, growing 6.7 per cent.
Read: Bank of Canada keeps key interest rate target on hold, but warns of looming hikes
The move also comes in response to inflationary pressures facing the Canadian economy. In the last quarter of 2022, the consumer price index stood at 5.1 per cent. The bank noted oil and commodity prices have risen sharply as a result of the uncertain situation in Europe. This is expected to be a driver of inflation around the world and cause supply chain disruptions that will curb global growth.
“Financial market volatility has increased. The situation remains fluid and we are following events closely.”
Despite the ongoing situation in Europe, the bank is also raising its expectations for Canada’s performance in the first quarter of 2022. While the Omicron variant of the coronavirus caused the labour market to shed jobs in January, household spending proved resilient and is expected to strengthen further as public health restrictions are curbed.
Read: Bank of Canada holds rate steady, says coronavirus economic recovery likely by 2022