Bank of Canada hikes interest rate to 3.75% in order to curb inflation

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The Bank of Canada has announced its sixth interest rate hike this year with an increase of 0.5%.

“The Bank of Canada today increased its target for the overnight rate to 3.75%, with the Bank Rate at 4% and the deposit rate at 3.75%,” central bank officials said in a news release on Wednesday.

Economists have been expecting a hefty increase in the Bank’s interest rates for weeks, with the last hike happening on September 7 (3.25%) in an attempt to curb inflation. Experts tracked by Bloomberg said they anticipated a 75 basis point increase.

CPI inflation decelerated from a record-breaking 8.1% in July to 6.9% in September, but this happened primarily due to a dip in gasoline prices. Two-thirds of CPI components have still increased more than 5% in the last year.

The Bank of Canada has raised its key interest rate five times this year, with the latest spike happening just last month.

On September 7, the central bank announced that it was increasing the rate to 3.25% in an attempt to curb inflation. It increased by 0.75% from the institution’s full percentage point hike in July to 2.5%. That was the biggest spike since 1998.

Late last week, Bank of Canada’s former governor, Mark Carney, told a Senate committee that Canada is likely headed for a recession citing, “difficult economic times.”

With recession fears looming over their heads, Canadians were even more anxious about a sixth rate update. Rents across the nation are becoming increasingly unaffordable, and a mortgage rate increase could add fuel to the fire.

A recent report by the Organization for Economic Co-operation and Development (OECD) already expects the Bank of Canada will increase its rate to 4.5% by 2023.

OECD warned that such a steep hike would be necessary to further bring rampant inflation under control, including reducing economic demand to put a real damper on rising labour costs due to the immense labour shortage.

“The effects of recent policy rate increases by the Bank are becoming evident in interest-sensitive areas of the economy: housing activity has retreated sharply, and spending by households and businesses is softening,” the Bank reported, adding that the slowdown in international demand is beginning to weigh on exports, too.

As a result of this increase, Canadians can expect economic growth to stall through the end of 2022 and the first half of 2023. The Bank projects GDP growth will slow from 3.25% this year to just under 1% next year and 2% in 2024.

CPI inflation is projected to move down to about 3% by the end of next year, and then return to the 2% target by the end of 2024, the Bank noted in its latest update.

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