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OTTAWA—The Bank of Canada raised interest rates on Wednesday by a quarter point and said it would now pause to assess the economic impact from sharply higher borrowing costs.
The Bank of Canada increased its target for the overnight rate to 4.50% from 4.25%, or the highest level in over 15 years. More important, the Bank of Canada is one of the first central banks among major developed-world economies to declare that it is done for now raising interest rates in the quest to bring inflation down from historically high levels. Central banks are trying to balance the risks between raising rates too aggressively and triggering a deep recession, and raising rates at too tepid a pace and allowing inflation expectations to remain elevated.
In the course of about 10 months, interest rates in Canada have climbed 4.25 percentage points. Meanwhile, the housing market, which helped power the recovery from the pandemic-fueled recession, weakened markedly. The Bank of Canada’s most-recent quarterly survey of companies indicated business confidence declined to its lowest level in over two years, and about a third of Canadian firms expected sales to decline over the next 12 months. Canada’s consumer-price index has cooled from a peak of 8.1% in June to a recent reading in December of 6.3%, and the Bank of Canada said inflation is projected to “come down significantly” in 2023.
“If economic developments evolve broadly with the outlook, the governing council expects to hold the policy rate at its current level while it assesses the impact of cumulative interest rate increases,” the Bank of Canada said in a statement outlining its decision.
Should the economy outperform expectations, the central bank said it was ready to raise rates to meet the 2% inflation target.
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Later this month, Federal Reserve officials begin deliberations before a Feb. 1 policy announcement, at which time the Fed is expected to slow the pace of rate increases for a second straight meeting. In December, the Fed raised the benchmark federal-funds rate by a half point to a range between 4.25% and 4.5%.
Twelve of 13 economists surveyed last week by The Wall Street Journal said they expected Canada’s central bank to lift its main interest rate by a quarter point, adding they expected the increase to be the last in this tightening cycle.
According to the Bank of Canada’s outlook, inflation is expected to reach 3.5% in the second quarter, citing lower energy prices, improvements in the supply-chain network and the impact of higher rates on consumption in Canada and abroad. The Bank of Canada said it anticipates reaching its 2% inflation target in 2024. Short-term gauges of core prices, which strip out volatile-items like food and fuel, have eased, “suggesting that core inflation has peaked,” the bank said.
The central bank said a rate increase, to 4.50%, was warranted because recent growth data was stronger than anticipated and the labor market remained tight, with the unemployment rate near historic lows and businesses reporting difficulties finding workers. Growth in 2022 likely hit 3.6%, slightly higher than its previous quarterly forecast. “However,” it said, “there is growing evidence that restrictive monetary policy is slowing activity, especially household spending.”
In an accompanying forecast, the central bank said mortgage interest payments as a share of after-tax income have climbed to 4.5% at the start of 2023, from 3.2% a year ago, and expects that level to increase further as homeowners renew their mortgages at higher rates.
Write to Paul Vieira at Paul.Vieira@wsj.com
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