The central bank announced a 25 basis point increase in the overnight lending rate to 4.75%.
“The Governing Council has decided to raise the policy rate, reflecting our view that monetary policy has not been sufficiently restrictive to rebalance supply and demand and return inflation to 2 percent on a sustainable basis.” said that.
The bank said Canada’s economy performed better than expected in the first quarter, with gross domestic product growing 3.1%. The level of demand was considered more stable than expected.
Meanwhile, consumer-level inflation jumped to 4.4 percent in April. – this is the first increase in 10 months. Lower energy prices starting in April could help ease inflationary pressures in the Canadian economy.
But so-called core inflation, which strips out volatile energy and food prices, remains high enough for the central bank to express concern that the rate could be “stuck” above its target rate.
The bank said on Wednesday that it would continue to assess the situation.
“In particular, we will assess whether developments in excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with the achievement of the inflation target,” the statement said.
A research note from investment bank ING’s James Knightly and Francesco Pesole said the surprise rate hike sets the tone for further action when the bank reconvenes in July.
“There was no other way to say that it would continue to assess inflation, wages and demand dynamics.” They wrote. “Nevertheless, the odds are definitely in favor of at least one extra step when you start hiking again in five months.
But the Canadian economy was already feeling some strain ahead of the surprise rate hike. The government said last month that its citizens had the highest level of household debt among the Group of Seven countries.
About three-quarters of all household debt in Canada is classified as mortgages, making the country particularly vulnerable to any future global economic crisis, according to a report by the Canada Mortgage and Housing Corporation.
If the central bank were to raise interest rates further, as expected, it would only add to the debt burden by raising mortgage rates.