The Bank of Canada raised interest rates to 0.5%, a 25-basis-point uptick that marked the first time that rates were increased by the nation’s central bank since 2018.
What Happened: In a statement, the Bank of Canada observed the nation’s economic growth in the fourth quarter of 2021 was at 6.7%, which it defined as “stronger than the Bank’s projection and confirms its view that economic slack has been absorbed.”
The Bank added it would continue with the reinvestment phase of its government of Canada bonds while keeping holdings roughly constant “until such time as it becomes appropriate to allow the size of its balance sheet to decline.”
But the Bank also warned that the Russian invasion of Ukraine created “a major new source of uncertainty” that has already caused prices for oil and other commodities to spike.
“This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth,” the Bank warned. “Financial market volatility has increased. The situation remains fluid and we are following events closely.”
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What Happens Next: The Bank added that today's announcement will not be a one-time happening.
“As the economy continues to expand and inflation pressures remain elevated, the Governing Council expects interest rates will need to rise further,” the Bank said in its statement.
While the Canadian and U.S. economies are not intertwined, the Bank’s decision to raise rates after keeping its foot on the financial brakes for roughly four years could be seen as a preview for the Federal Reserve’s actions when its policymaking Federal Open Market Committee meets on March 15-16.
In his semi-annual address to Congress earlier today, Federal Reserve Chairman Jerome Powell stated rate hikes were coming, despite the new geopolitical and economic thorns created by Russia’s invasion of Ukraine.
"The bottom line is we will proceed, but we will proceed carefully as we learn more about the implications of the Ukraine war for the economy," Powell said in an appearance before the House Financial Services Committee. "We will avoid adding uncertainty to what is already an extraordinarily challenging, uncertain environment."
Photo: JCH Numisatics
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