Bank of Canada surprises with 100-bp rate hike as inflation risks gather steam

The Bank of Canada surprised 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.

The central bank, in a regular rate decision, 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 was defending Canada’s currency.

The Bank of Canada also warned that it now sees inflation averaging around 8% for next few months, noting that while global factors have driven gains, domestic price pressures are becoming more prominent.