Bank of Canada raises rates to 14-year high, keeps door open for further tightening

Bank of Canada Governor Tiff Macklem walks in front of the Bank of Canada building in Ottawa, Ontario, Canada, June 22, 2020. REUTERS/Blair Gable/File Photo

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OTTAWA, Sept 7 (Reuters) – The Bank of Canada on Wednesday raised interest rates to their highest level in 14 years, as expected, and signaled that its most aggressive tightening campaign in decades had not been waged amidst a battle to keep inflation from balancing out. hotter.

The central bank, in a regular rate decision, raised its key rate from 2.50% to 3.25%, matching analysts’ forecasts and reaching a level not seen since April 2008. Rates are now above from the Bank of Canada’s neutral range, meaning for the first time in about two decades monetary policy is likely to constrain growth.

“Given the outlook for inflation, the Governing Council still believes that the policy interest rate will need to rise further,” the central bank said in a statement after announcing its fourth straight outsized hike.

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“As the effects of tighter monetary policy ripple through the economy, we will assess how much interest rates need to rise to bring inflation back to target.”

The Bank of Canada leads its advanced economy counterparts in policy tightening, having raised its key rate by 300 basis points since March from a record low of 0.25%, and it doesn’t seem yet to be done.

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“It feels like the bank is preparing the market for the possibility that rates will have to keep rising for more than one or two meetings,” said Andrew Kelvin, chief strategist for Canada at TD Securities.

“I think they try to keep as many options open as possible,” he added.

Headline inflation in Canada fell to an annual rate of 7.6% in July from 8.1% in June, but the central bank noted that the decline was due to lower gasoline prices, measures basis continuing to rise.

“Surveys suggest short-term (inflation) expectations remain elevated. The longer this lasts, the greater the risk of high inflation taking root,” the central bank said.

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Money markets are betting on two more increases of a quarter of a percentage point this year to take the key rate to 3.75% in December.

Economists noted the possibility of a 50 basis point hike in October followed by a standard 25 basis point hike in December, opening the door to a policy rate of 4.00% by the end of the year. year, although much will depend on the trajectory of inflation and employment over the coming months.

“There is a pretty high risk that they will raise rates at each of the next two meetings,” said Doug Porter, chief economist at BMO Capital Markets.

“We’ll have to see if it’s just small increases or more, and I think a lot of that will depend on what happens to headline and core inflation over the next few months.”

The Canadian dollar was trading down 0.1% at 1.3170 per greenback, or 75.93 US cents, as oil prices fell.

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Reporting by Julie Gordon and David Ljunggren in Ottawa, additional reporting by Ismail Shakil in Ottawa and Fergal Smith in Toronto; Editing by Andrea Ricci and Paul Simao

Our standards: The Thomson Reuters Trust Principles.

David Ljunggren

Thomson Reuters

Covers political, economic and general news from Canada as well as breaking news across North America, previously based in London and Moscow and winner of Reuters Treasury Scoop of the Year.

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