Bank of Canada Raises Interest Rates 25 basis points to 0.50%

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By Ketki Saxena

Investing.com -- The Bank of Canada today hiked its overnight rate 25 basis points to 0.50%. Prior to today’s announcement, the BoC had held its benchmark rate at 0.25% since March 2020, when Canada’s central dropped rates to their lowest possible to combat economic contraction as a result of the COVID pandemic. 

A rate hike was widely expected and considered long overdue by economists as inflation soared to a 30 year high, while the Canadian economy remained robust and resilient to the most recent wave of the Covid-19. Canada's GDP posted solid growth of 6.7% in the last quarter. 

As per a press release by the bank, GDP growth was “Stronger than the Bank’s projection and confirms its view that economic slack has been absorbed". The bank also notes that “the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. Overall, first-quarter growth is now looking more solid than previously projected.” 

The Bank’s raising of rates comes despite the escalating conflict in Ukraine, and persisting global supply chain issues, which it points to as key drivers of inflation. In its press release, the bank notes that  "Poor harvests and higher transportation costs have pushed up food prices. The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities." The bank now expects “inflation to be higher in the near term than projected in January.”

The Bank of Canada became the second G7 central bank to raise rates since the onset of the pandemic after the Bank of England hiked its benchmark rate in December. The Fed is anticipated to raise rates later this month, with some analysts calling for an aggressive 50 basis-point move by the Fed.