The Bank of Canada raised its benchmark rate by 100 basis points on Wednesday, a surprise move that exceeded economist expectations, as the central bank attempts to set a firehose against scorching inflation.
The unexpected and supersized increase comes after two consecutive 50 basis point hikes, bringing the policy interest rate to 2.5 per cent, the highest level since 2008. It marks the first time the central bank has hiked its benchmark rate by a full percentage point since 1998, and was more aggressive than the 75 basis point increase most economists had widely predicted.
"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 by raising the policy rate by 100 basis points today," the Bank of Canada said in a statement.
The central bank also continued to warn on Wednesday of more hikes to come, saying that "interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation."
But Bank of Canada Governor Tiff Macklem said at a press conference Wednesday that the surprise move – an increase he called "very unusual" – was necessary to combat inflation, which has reached levels not seen in nearly 40 years. Inflation hit 7.7 per cent in May, marking the biggest year-over-year increase since January 1983. Macklem says the bank expects the Consumer Price Index (CPI) to remain at around 8 per cent for "a few months."
"Inflation is too high, and more people are getting more worried that high inflation is here to stay. We cannot let that happen. Restoring price stability—low, stable and predictable inflation—is paramount," Macklem said.
"Our goal is to get inflation back to its two per cent target with a soft landing for the economy. To accomplish that, we are increasing our policy interest rate quickly 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."
The Bank of Canada is one of many central banks around the world on an aggressive path to tighten monetary policy in the wake of skyrocketing inflation. Wednesday's decision makes the Canadian central bank's policy rate the highest among G7 countries.
The central bank has estimated that the neutral range, where the interest rate is no longer stimulative, is within two and three per cent. Macklem says the bank is front-loading interest rate increases now to avoid higher rates down the road, which will bring the policy rate "quickly to the top end or slightly above the neutral range."
"The Bank seems determined to get to the finish line as quickly as possible," CIBC Capital Markets economist Karyne Charbonneau wrote in a research note.
"They are likely considering a move of 75 basis points in September, and it will take some downside data surprises to hold them to 50."
Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.