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Bank of Canada Increases its Benchmark Interest Rate to 2.50%

Today, the Bank of Canada increased its overnight benchmark interest rate 100 basis points to 2.50% from 1.50% in June – the largest single increase in almost 25 years. This is also the fourth time this year that the Bank has acted to tighten money supply to combat the possibility of an entrenched inflationary cycle, although previous moves were much smaller (0.25% in March and 0.50% in each of April and June).

The Bank characterized this progressively larger increase as a way to “front-load the path to higher interest rates,” a clear signal that it is concerned that elevated inflation will become entrenched without affirmative action and that more rate hikes are almost certainly on their way.

With this latest increase, the Bank Rate rises to 2.75% and the deposit rate increases to 2.50%.

These are the highlights of today’s announcement.


Inflation at home and abroad

  • Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report, and will likely remain around 8% in the next few months

  • Global factors including the war in Ukraine and supply disruptions are the biggest drivers, but “domestic price pressures from excess demand are becoming more prominent”

  • Surveys indicate more Canadian consumers and businesses are expecting inflation to be “higher for longer,” raising the risk that elevated inflation becomes entrenched in price- and wage-setting; “if that occurs, the economic cost of restoring price stability will be higher”

  • The July outlook for Canada has inflation “starting to come back down later this year, easing to about 3% by the end of next year and returning to the 2% target by the end of 2024”

  • Global inflation is higher and accordingly, many central banks are also tightening their monetary policies

Canadian and global economies

  • As a result of tighter financial conditions, economic growth is “moderating” and will continue to do so as tighter monetary policy works its way through the economy; when combined with the resolution of supply disruptions, the Bank believes this change “will bring demand and supply back into balance and alleviate inflationary pressures”

  • As a result, the Bank now expects Canada’s economy to grow by 3.5% in 2022, 1.75% in 2023, and 2.5% in 2024 and for global economic growth to slow to about 3.5% this year and 2% in 2023 before “strengthening to 3% in 2024”

  • Canadian labour markets are tight with a record low unemployment rate, widespread labour shortages, and increasing wage pressures

  • With strong demand, Canadian businesses are passing on higher input and labour costs by raising prices

  • Domestic consumption is robust, led by a rebound in spending on hard-to-distance services, while business investment is solid and exports are being boosted by elevated commodity prices

  • The Bank estimates that Canada’s Gross Domestic Product grew by about 4% in the second quarter

  • In the United States, high inflation and rising interest rates are contributing to a slowdown in domestic demand

  • China’s economy is being held back by “waves of restrictive measures” to contain COVID-19

Canadian housing market

  • As growth in Canada is expected to slow to about 2% in the third quarter as consumption moderates, the BoC is now projecting that housing market activity will “pull back following unsustainable strength during the pandemic”

Looking ahead

Along with noting that its Governing Council decided to “front-load the path to higher interest rates” with today’s 100 basis point increase, the BoC also said it “continues to judge that interest rates will need to rise further, and the pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation.”

The Governing Council stated that it is “resolute” in its commitment to price stability and will continue to take action as required to achieve its 2% inflation target. The message to the market is clear: inflation must be corralled and higher interest rates are to be expected.

This is an evolving story with the next scheduled chapter landing on September 7th, 2022 – the date of the BoC’s next policy announcement.

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