Bank of Canada Hikes Key Rate by 0.5% to 1.0%, Starts Quantitative Tightening

© Reuters.

By Geoffrey Smith

Investing.com -- The Bank of Canada raised its key interest rate by 50 basis points to 1.0% and said it will begin the process of 'quantitative tightening' from April 25, unwinding some of the bond purchases it has made during the pandemic.

The move is the second 50 basis point hike by an advanced economy central bank on Wednesday, coming only hours after the Reserve Bank of New Zealand also took the same step - its biggest rate hike in 22 years.

The BoC said in its policy statement that there has been a "substantial upward revision" to the outlook for inflation in Canada, pointing to "price spikes in oil, natural gas and other commodities" and "supply disruptions resulting from the war" in Ukraine. It now expects inflation to average nearly 6% in the first half of this year, before moderating to around 2.5% in the second half of 2023, finally returning to the bank's 2% target in 2024.

"Growth is strong and the economy is moving into excess demand," the bank said. "Labor markets are tight, and wage growth is back to its pre-pandemic pace and rising. Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices."

The Bank didn't give any indication that it would begin actively selling its bond portfolio. Instead, it will rather no longer reinvest the proceeds of bonds that mature. Governor Tiff Macklem is due to elaborate on the bank's decisions at a press conference beginning at 12 PM ET.

The Canadian dollar strengthened on the news, reversing earlier losses to trade at C$1.2650 to the U.S. dollar, effectively unchanged on the day.  The loonie had lost over a cent against the greenback since the start of April, as the market priced in a faster tightening of monetary policy by the U.S. Federal Reserve.