Bank of Canada raises key interest rate, making the cost of borrowing more expensive

Bank of Canada raises key interest rate, making the cost of borrowing more expensive

The Bank of Canada has raised its policy interest rate again, making the cost of borrowing more expensive.

The 25 basis points hike brings the Bank’s overnight rate to 5%, the highest it’s been since 2001.

In its Monetary Policy Report, the Bank of Canada says the rate increase was necessary to help slow economic growth and reduce core inflation. Three-month rates of core inflation have been higher than the Bank’s expectation hovering around 3.5% to 4% since September 2022.

Since the Bank of Canada started raising rates in March 2022 inflation has dropped from a peak of 8.1 % last summer to 3.4 % in May.

While the Bank acknowledges inflation has been declining due to falling energy prices, easing supply constraints and interest rate hikes, it predicts inflation will remain elevated around 3% over the next year.

The central bank’s mandate is to keep inflation around 2% and its forecasters are currently predicting inflation will return to that 2% level in the middle of 2025, two quarters later than previously projected.

Today’s monetary policy report makes no mention of an interest rate pause leaving the door open to another hike.

The Bank of Canada’s next rate decision comes down September 6th, 2023.