Bank of Canada Unexpectedly Raises Key Interest Rate

On Wednesday, the Bank of Canada announced an unexpected increase in its key interest rate, citing excessive economic growth as one of the reasons for the rate hike.

Details on the Interest Rate Hike

Bloomberg news agency said the Monetary Policy Committee, chaired by Central Bank Governor Tiff Macklem, decided to raise the main interest rate to 4.75%, the highest level since 2001, noting that one analyst out of 5 analysts polled expected the move.

“Overall, the excess demand in the economy is likely to last longer than expected,” the central bank said in a statement.

Impact on Bond Yields and Currency Exchange

Two-year Canadian bond yields rose after the announcement of the rate hike to 4.571, the highest level since August 2007, while the Canadian dollar rose against its US counterpart to CAD 1.3347 per US dollar.

Rationale for the Interest Rate Hike

The Central Bank of Canada said monetary policy is not tight enough to strike a balance between supply and demand and bring inflation back to its 2% target, pointing to a buildup of data including higher-than-expected gross domestic product growth during the first quarter of this year, strong the rate of inflation and booming activity in the housing sector.

Comparison to Australian Central Bank’s Decision

The Canadian central bank’s action came a day after the Australian central bank decided to raise its benchmark interest rate by 25 basis points, its twelfth consecutive hike to 4.1%, warning of more possible hikes after annual inflation in country surpassed an expected record 6.8% in the first quarter of this year.

Source

Source: dpa + “Bloomberg”