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Bank Of Canada Interest Rate Jumps To 2.5%

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The Bank of Canada has raised its benchmark interest rate to 2.5 per cent — the steepest climb in more than 20 years and its fourth consecutive increase since March.

Speaking to reporters in Ottawa late Wednesday morning, Bank of Canada Governor Tiff Macklem said the hike represents unusual economic circumstances.

It comes at a time when inflation sits at nearly eight per cent, a level not seen in nearly 40 years.

“Inflation is too high and more people are getting more worried that high inflation is here to stay,” said Macklem, noting that Wednesday’s decision was not taken lightly.

“We cannot let that happen. Restoring price stability and low, stable and predictable inflation is paramount.”

Macklem said inflation is broadening because the Canadian economy is in excess demand of goods and services. Employers are also experience a shortage of workers and have to increase wages in order to attract and retain staff.

Higher interest rates would help slow demand, allowing supply to catch up and price pressures to ease, Macklem said, noting that the central bank’s goal is to bring inflation back to its two per cent target.

“To accomplish this, we are increasing our policy rate quickly to prevent high inflation from becoming entrenched,” said Macklem.

“If it does, it will be more painful for the economy and for Canadians to get inflation back down.”

The bank is forecasting annual growth and economic activity will be around 3.5 per cent this year, 1.25 per cent next year and 2.5 per cent in 2024. Macklem said as global bottlenecks gradually resolve, inflation will start to come down.

“While we may see a few more months with CPI inflation close to eight per cent, we expect it to decline later this year, ease to three per cent by the end of next year and return to the two per cent target in 2024,” said Macklem.

“This is the soft landing we are projecting.”

Macklem said a 2.5 per cent interest rate is directly in the middle of what he calls the “long-run neutral range” that “neither stimulates nor restricts growth,” estimating that range to be between two and three per cent.

“We are acutely aware that higher interest rates will affect Canadians who are already feeling the pain of high inflation,” said Macklem.

“It can seem counterintuitive to add to the interest costs Canadians face in order to combat the cost of inflation, but by increasing the cost of borrowing, we will moderate spending and return inflation to that target.”

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Report: Canada’s Finances OK Right Now

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For the time being, Canada’s finances are not too worrisome for a regional think tank.

Charles Cirtwell is Northern Policy Institute’s President, and tells us while the federal government keeps providing support during COVID-19, the debt to GDP ratio now is about 34%, much better than 25 years ago. “For those of us around in ’95, it was double back then. For those folks who remember years of cutting spending, no bridges, no twinning highways, closing hospitals…. it was twice as bad.”

The Policy Institute President estimates another four to five months before mid 90’s levels are reached. The debt to GDP ratio is the amount of debt owed compared to economic output, or, in other terms, the amount of debt a household has compared to income and the ability to pay.

However, a potential second wave is leaving him concerned. According to government figures, the budget deficit at roughly $350-billion, which hasn’t been seen since the Second World War, leaving Cirtwell questioning the $500 weekly Canada Emergency Response Benefit.

“There’s no question that we’re going to quickly get to a point where we’re not going to be able to sustain this. And the level of support, yeah, we’re planning on winding that down. But if we get a second wave, we’ll have to take a look at winding that back up. But I don’t think we’ll be able to afford the $500 in the second round,” says the Policy Institute President.

As for taxes, he says any politician promising no new taxes to pay for COVID-19 is lying. Cirtwell points out all political parties are hinging on economic recovery, while he’s looking at consumption taxes, such as the Goods and Services Tax.

“So instead of going after high income earners, or increasing personal income tax for all of us, which slows the return to work, I’d like to see a shift onto that consumption tax. The Harper government took away two percentage points on the GST.”

Cirtwell adds the Bank of Canada has kept the prime interest rate around 3-percent, in the mid 90’s it was about nine.