The Bank of Canada decided to raise its benchmark interest rate to 4.75 per cent on Wednesday.
It’s the first time that Canada’s central bank has raised its trend-setting interest rate since January, when the bank signalled it would conditionally pause its aggressive campaign of rate hikes to wait and see if it had done enough to bring down inflation.
Since then, the data has shown the Canadian economy to be unexpectedly resilient, as it has grown by more than expected. After declining for nine months in a row, the inflation rate unexpectedly ticked higher last month.
The bank’s latest move takes the rate to its highest level since 2001.
While investors and economists thought there was a slight chance the bank would raise the rate now, the move nonetheless came as a surprise to the consensus view that the bank would probably do so later this year.
Now, however, observers are increasing their bets that even more rate hikes are coming.
Royce Mendes, an economist with Desjardins, is among those who thinks they aren’t done yet.
“It’s unlikely they’ll see enough progress towards restoring price stability before their next scheduled rate decision for this to be the final hike of the cycle. As a result, we continue to lean towards another 25-basis-point rate hike in July, which would take the policy rate up to five per cent,” he said.
Trading in investments known as swaps has fully priced in at least one more hike by the end of the year, and is even open to the possibility of one more past that, to 5.25 per cent or beyond.
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