The Bank of Canada raised its key interest rate target for the first time since slashing its benchmark rate to its rock-bottom level at the start of the COVID-19 pandemic.
The central bank increased its key rate by a quarter of a percentage point to 0.5 per cent on Wednesday in a bid to help fight inflation which is at its highest level since 1991.
The higher rate is expected to prompt the country’s big banks to raise their prime lending rates, a move that will increase the cost of loans such as variable-rate mortgages that are linked to the benchmark.
The Bank of Canada cut its key interest rate to the emergency level of 0.25 per cent in March 2020 in an effort to help the economy weather the economic shock of the pandemic.
Since then, the economy has rebounded and inflation has jumped with the central bank saying today that it now expects inflation to be higher in the near-term than it previously thought.
The annual inflation rate in January of 5.1 per cent marked a three-decade high.
The Bank of Canada previously forecast annual inflation for the first quarter would be 5.1 per cent, but that was before Russia’s invasion of Ukraine sent oil prices higher and created new supply disruptions that will add to global price pressures.
The bank said persistently elevated inflation raises the risk that Canadians start to expect that inflation will stay higher for longer.
To keep inflation and expectations anchored, the bank said it plans to use interest rates to get inflation rates back to its two per cent target.
Senior decision-makers at the bank expect interest rates will need to rise further, although the timing and pace of those hikes will be tied to how the bank views the Canadian economy.
Statistics Canada said Tuesday that the economy grew at an annual rate of 6.7 per cent over the last three months of 2021, which was stronger than the Bank of Canada had expected.
The bank also expects growth in the first quarter to be more solid than its previous projections in January, even with an Omicron-related setback that month that saw 200,000 jobs lost.
The bank said the labour market setback should be temporary, and strong household spending should strengthen further as public health restrictions ease as several provinces have started to do this month.
Still, the bank said COVID-19 and the possibility of new variants remain a concern.