Canada Announces Ultra-Aggressive 1 Percent Rate Hike

Bank of Canada Governor Tiff Macklem has announced a supersizing interest rate hike of a full percentage point. The move left Canadians shocked, especially given the country’s hot housing market and heavy debt loads.

The Bank of Canada has a targeted inflation rate of 2%. However, with Canada’s May inflation rate hitting 7.7%, its highest rate in nearly 40 years, a much more aggressive response was required.

The country’s central bank typically increases its policy rate in measured 0.25% increments, but this week’s ultra-aggressive increase of a full 1% brings the Canadian rate to 2.5%.

An increment of this size has not happened in over 20 years. While it is projected to have immediate implications for consumers, experts say it is a necessary step for putting out the flames of inflation, even if it douses Canada’s economy at the same time.

May's inflation figure was even higher than the central bank was anticipating, which means the Bank of Canada’s focus is preventing high inflation from gaining traction.

What does this mean for me? 

The Bank of Canada, like its US counterpart the Federal Reserve, chose to keep rates close to zero for the first two years of the pandemic to help boost the economy, but creeping inflation has forced them to act almost in tandem.

Normally, economists would be concerned that such supersizing hikes could push the country into a recession. However, with inflation at four-decade-highs, the Bank of Canada, and, indeed, other central banks, has had little choice.