The Bank of Canada on Wednesday raised its key interest rate from 0.25% to 0.50%, starting a much-awaited cycle of rate hikes to address persistently high inflation.
Ukraine war will add to inflation
The rate hike that marks Canada’s first since 2018 comes at a time when Russia has started a war in Ukraine. The uncertainty related to the geopolitical tensions will aggravate inflationary pressures, agreed governor of the Bank of Canada, Tiff Macklem.
The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth.
The central bank stayed put on the benchmark interest rate in recent years to support the economy amidst the COVID-19 pandemic.
How high could rates go?
Now that the crisis is rolling off, however, and the Ukraine war has sent oil prices well above $100 a barrel, it has started with the 25 basis points increase on Wednesday, with more expected later this year. As per Scotiabank’s Shaun Osborne:
Today’s statement provides content on the outlook for policy moving forward, with a clear warning that further hikes are likely to follow quickly, and that the Bank’s balance sheet is poised to shrink fairly quickly from here.
The hawkish GDP figures released a day earlier also added to the central bank’s confidence that the economy had recovered the impact of the pandemic. CIBC’s Avery Shenfeld expects the central bank to raise rates by 25 basis points each in the next three meetings.
The benchmark S&P/TSX Composite index is up nearly 1.0% on Wednesday.
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