The Bank of Canada surprised citizens on Wednesday with a full-percentage-point increase to its policy rate, a super-sized hike last seen in 1998, citing “higher and more persistent” inflation and the increased risk of those price gains becoming entrenched.
In a regular rate decision, the central bank raised its policy rate to 2.5% from 1.5% and said more hikes would be needed. The move was more forceful than the 75-basis point increase economists and money markets had forecast.
“With the economy clearly in excess demand, inflation high and broadening, and more businesses and consumers expecting high inflation to persist for longer, the Governing Council decided to front-load the path to higher interest rates,” the bank said.
The policy rate is now at the nominal neutral rate – the midpoint between 2% and 3% – where monetary policy is neither stimulative nor restrictive. The increase matches a 100-bp hike in August 1998, when the central bank defended Canada’s currency.