Bank of Canada raises key interest rate for eighth time, to 4.5 per cent. What you need to know

The interest rate hikes are over — probably.

The Bank of Canada raised its key overnight lending rate for the eighth straight time Wednesday morning, but signalled its rate-hiking campaign could finally be over.

The central bank bumped the overnight rate up by 25 basis points — a quarter of a percentage point — to 4.5 per cent, just what markets had been expecting.

“If economic developments evolve broadly in line with the … outlook, Governing Council expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases,” the Bank said in a news release announcing the 25-basis point increase.

The Bank also said previous hikes have been having their desired effect of slowing inflation by hitting consumer demand.

“There is growing evidence that restrictive monetary policy is slowing activity, especially household spending. Consumption growth has moderated from the first half of 2022 and housing market activity has declined substantially,” the Bank said.

“As the effects of interest rate increases continue to work through the economy, spending on consumer services and business investment are expected to slow. Meanwhile, weaker foreign demand will likely weigh on exports. This overall slowdown in activity will allow supply to catch up with demand,” the Bank predicted.

The Bank also said the Canadian economy likely grew by 3.6 per cent in 2022, slightly higher than it had forecast in October. It also predicts the Canadian economy will grow by just one per cent this year, and by two per cent in 2024

Despite evidence of a slowdown, the Bank justified Wednesday’s increase by pointing to continued high inflation. In December, the Consumer Price Index was 6.3 per cent higher than it was a year earlier. While that was down from 6.8 per cent in November — and a big drop from the 8.1 per cent seen in June — it’s still more than three times the Bank’s two per cent target for inflation.

“With persistent excess demand putting continued upward pressure on many prices, Governing Council decided to increase the policy interest rate by a further 25 basis points,” the Bank said.

The Bank also released its quarterly analysis of the state of the Canadian economy, and for the first time ever, published minutes of its internal debate that led to Wednesday’s decision.

In an attempt to get inflation under control, the Bank raised the overnight lending rate seven times in 2022, most recently bumping it by 50 basis points (half a percentage point) to 4.25 per cent in early December.

The overnight rate began last year at 0.25 per cent, where it had been since the Bank dropped it three times in one month in March 2020, as the global COVID-19 pandemic was declared.

The theory is that by making it more costly to borrow money, people will spend less, eventually driving prices down.

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By Josh RubinBusiness Reporter