BoC raises key interest rate to 5%, expects slower return to inflation target

The Bank of Canada raised interest rates again on Wednesday (July 12) and released new projections that suggest it will take longer to get inflation back to 2%.

The central bank hiked its key interest rate by a quarter of a percentage point, bringing it to 5%.

Forecasters were widely anticipating the central bank to raise rates as the economy continues to run hotter than expected, despite interest rates being at the highest levels in decades.

The Bank of Canada says the rate hike was prompted by elevated demand in the economy driven by strong consumer spending, as well as signs that prices continue to rise rapidly.

READ: Canadian economy holds steady in April as real GDP remains unchanged, StatCan reports

"Canada's economy has been stronger than expected, with more momentum in demand,'' the Bank of Canada said in its statement about the decision.

The central bank stayed mum on whether it plans to raise rates again. Instead, it says the governing council will continue to monitor how the economy evolves.

It said it would be watching for how excess demand, inflation expectations, wage growth and corporate pricing behaviour influence inflation as it makes its policy decisions.

Wednesday's decision follows a rate hike in June, which brought the central bank's previous pause on interest rate increases to an end.

The Canadian economy was widely expected to stall this year, but instead, economic data has been stronger than most forecasters, including the central bank, had expected.

And although inflation has fallen considerably since last summer, prices for many goods and services continue to rise rapidly.

Canada's inflation rate reached 3.4% in May, down from 8.1% last summer. Meanwhile, grocery prices rose 9% in May compared to a year ago.

READ: Canada's inflation rate falls to 3.4% last month, lowest rate since June 2021

The central bank's updated economic projections released in its monetary policy report suggest it will take Canada longer to get back to the two per cent target.

The Bank of Canada now expects inflation to stall around three per cent for the next year, before steadily declining to two per cent by mid-2025.

"This is a slower return to target than was forecast in the January and April projections. Governing council remains concerned that progress toward the two per cent target could stall, jeopardizing the return to price stability,'' the Bank of Canada said.

The central bank also expects stronger economic growth this year both globally and domestically. It revised its projection for real gross domestic product growth in Canada to 1.8% for 2023, up from 1.1%.