Like us at an open bar, T-Mack and friends have said, “Sure, I’ll have another one.”
What happened: Tiff Macklen and the Bank of Canada (BoC) did what most economists expected and raised the base interest rate by 0.25 of a percentage point to 5%—the highest rate seen (by anyone over 21) since 2001.
- The BoC cited surprisingly strong economic activity, a shockingly resilient housing market, and an enduringly tight labour market as the key reasons for the hike.
- Even though inflation fell to 3.4% in May—way down from a high of 8.1% last August—the BoC is still concerned about underlying price pressures.
What’s next: We’ll have to wait until September 6 for the thrilling follow-up while the BoC pores over summer inflation stats before making a move. Macklem said the bank is “prepared to increase our policy rate further, but we don’t want to do any more than we have to.”
- Macklen’s neither-here-nor-there stance has split economists, with one side reading it as a sign that rates will take a breather and the other predicting yet another hike.
Why it matters: Getting the interest rate right is a big deal. One hike too many could severely stifle economic growth and send Canada into a prolonged recession, while also making it harder for increasingly indebted households to meet their payment obligations.
However, one hike too few and inflation might never return to the bank’s 2% target, as spending adjusts to a new permanently high inflation world. No pressure, Tiff!—QH