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Bank of Canada Raises Policy Rate by 25 Basis Points

The Bank of Canada on Wednesday resumed tightening and increased its benchmark interest rate by 25 basis points to 4.75 percent.

The bank’s governing council decided to increase the policy rate again, reflecting its view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2 percent target, the central bank said in a press release.

The bank conducted eight consecutive interest rate hikes since March 2022, adding 425 basis points in total to tackle inflation. However, it maintained the policy rate at 4.5 percent in March and April this year.

According to the bank, consumer price index (CPI) inflation ticked up in April to 4.4 percent, the first increase in 10 months, with prices for a broad range of goods and services coming in higher than expected. Goods price inflation increased, despite lower energy costs. Services price inflation remained elevated, reflecting strong demand and a tight labour market.

The bank continued to expect CPI inflation to ease to around 3 percent in the summer, as lower energy prices feed through and last year’s large price gains fall out of the yearly data.

However, with three-month measures of core inflation running in the range from 3.5 percent to 4 percent for several months and excess demand persisting, concerns have increased that CPI inflation could get stuck materially above the 2 percent target, the bank said.

The governing council will in particular be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behaviour are consistent with achieving the inflation target before announcing the rate target next month, the bank said.

The bank added it is also continuing its policy of quantitative tightening to complement its restrictive stance of monetary policy and normalizing its balance sheet.

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