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The hike follows the 50-basis-point increase in April.

Bank of Canada Governor Tiff Macklem.

Macklem is the Governor of the Bank of Canada.

Adrian Wyld/Canadian Press

The Bank of Canada raised its benchmark interest rate to 1.5 per cent on June 1. What you need to know is here.

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Only getting started

A steep path to higher interest rates has been selected by the central bank. Policymakers have raised borrowing costs at three consecutive meetings, and at the last two they chose for large half-point increases, the first time that has happened since the Bank of Canada started scheduling interest-rate announcements in 2000. They prefer quarter-point changes.

The Governor of the Bank of Canada is getting started. The consumer price index increased in April from a year earlier, and his goal is to keep it going at an annual rate of two per cent. That's worrisome, but central bankers made clear in their new policy statement that inflationary pressure continues to build.

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The statement said that the consumer price index will likely move even higher in the near term before beginning to ease. Higher interest rates will be required to choke demand.

The bank will use monetary tools to return inflation to target and keep inflation expectations well-anchored.

Excess demand

Much of the inflation is outside the control of the Bank of Canada. Most of the world's richer economies are facing similar situations because of supply shortages related to the Pandemic and surging commodity prices related to Russia's invasion of Ukraine.

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The economy recovered quickly from the COVID recession. Statistics Canada reported May 31 that the economy grew at an annual rate of three per cent in the first quarter, and that the unemployment rate is at a modern low.

The Bank of Canada said that the economy is operating in excess demand and is expected to grow in the second quarter.

Canada is in a good position to face the global recession because other big economies struggled in the first quarter. inflationary pressure is being added by all that activity. The Bank of Canada said that housing markets aremoderating, even from high levels.

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Wage growth has been picking up and broadening across sectors as housing prices tumble, but it also suggests that policymakers might be losing their grip on inflation expectations. Expectations notwithstanding, higher wages are indicative of a market that is in need of supply. If companies have to pay more for workers, they will raise prices to make up for it. Inflation might look like that.

Where do we go from here?

The Bank of Canada was candid about where interest rates are headed.

With the economy in excess demand, and inflation expected to move higher in the near term, the Governing Council continues to judge that interest rates will need to rise further.

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Most Bay Street observers of the Bank of Canada think that the language means at least one more half-point increase when policymakers meet in July, which would put the benchmark rate at two per cent.

  1. Bank of Canada governor Tiff Macklem.
  2. Tiff Macklem, governor of the Bank of Canada, speaks during a news conference in Ottawa, Ontario, Canada, on Wednesday, Oct. 27, 2021. The Bank of Canada ended its bond-buying stimulus program and accelerated the potential timing of future interest rate increases amid worries that supply disruptions are driving up inflation. Photographer: Adrian Wyld/Canadian Press/Bloomberg ORG XMIT: 775729909
  3. Canada's economy grew 3.1 per cent in the first quarter, falling short of expectations.
  4. The Bank of Canada in Ottawa.

The central bank estimates that an interest-rate setting of between two per cent and three per cent is neutral and doesn't stoke or choke economic growth. Most economists think the Bank of Canada will need to go higher than two per cent to smother inflationary pressures, but they are not sure if that means a benchmark rate of 2.5 per cent, three per cent, or something even higher.

The Bank of Canada seems to be headed for the higher end of its neutral range.

Policymakers said that the pace of further increases in the policy rate will be guided by the bank's assessment of the economy and inflation, and that the Governing Council is prepared to act more forcefully if needed to achieve the two-.


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