This week the Bank of Canada (BoC) raised the Canadian interest rate by a full 1%, the largest hike since 1998, bringing the interest rate to 2.5%. Analysts and markets were expecting a 0.75% hike, so this is a surprise, and not a welcome surprise. With inflation in Canada hitting 7.7% in May, the BoC stated it went with a 1% hike because “Canadians are getting more worried that high inflation is here to stay. We (BoC) cannot let that happen” and to ”prevent high inflation from becoming entrenched. If it does, it will be more painful for the economy — and for Canadians — to get inflation back down.”
This rate is what Canada’s banks get when they borrow from Canada’s central bank. The rate that you and I pay when borrowing for things like mortgages and lines of credit from those same banks is considerably higher. If you have any variable rate debt, life has gotten more expensive.
Russia’s war in Ukraine and supply chain bottlenecks caused by labour shortages combine to keep the pace of price growth high. Meanwhile, employment still runs high so the BoC will continue to raise interest rates until economic pain (or the government) forces the BoC to back off the interest rates and accept the high inflation levels as the inflation rate drifts its way back down to the desired 2% – 3% range.
In the US, inflation rose 1.3% from May to June leading to US consumer prices jumping 9.1% since the same time last year. Driven by gas, shelter, and food, this is the highest level of inflation in 40 years. The high numbers open the door for the US Fed to be more aggressive in their fight against inflation. With a 1% hike now an option, that .75% that people were hoping to dodge, has started to look rather good considering the alternative.