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Bank of Canada hikes key rate by 75 bps for first time since 1998

Bank of Canada Governor Tiff Macklem takes part in a news conference in Ottawa, Ontario, Canada April 13, 2022. REUTERS/Blair Gable

The Bank of Canada raised its benchmark rate by 100 basis points on Wednesday, a surprise move that exceeded economist expectations, as the 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. It is the largest increase since 1998.

Most economists had widely forecast that the bank would raise rates by three-quarters of a percentage point.

“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.”

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. Inflation hit 7.7 per cent in May, surpassing economist expectations and marking the biggest year-over-year increase since January 1983. Economists expect inflation reached the 8 per cent threshold in June, when gas prices surged.

The central bank has estimated that the neutral range, where the interest rate is no longer stimulative, is within two to three per cent.

More to come.

Alicja Siekierska is a senior reporter at Yahoo Finance Canada. Follow her on Twitter @alicjawithaj.

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