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Bank of Canada Surprises With Half-Point Interest-Rate Rise to 3.75%


OTTAWA—The Bank of Canada raised its main interest rate on Wednesday at a lighter-than-expected pace, as the central bank said it expected close to zero growth starting late this year and through the first half of 2023 owing to lower household and business spending.

Canada’s central bank increased its target for the overnight rate by a half-percentage point from 3.25% to 3.75%, the highest level in roughly 14 years. Three-quarters of economists surveyed last week by The Wall Street Journal expected the Bank of Canada to deliver a second straight 0.75-percentage-point rate increase, citing elevated inflation and remarks from Gov.

Tiff Macklem

that signaled no end to the central bank’s aggressive tightening campaign.

With Wednesday’s decision, interest rates in Canada are now 3.50 percentage points higher than when they started 2022, marking one of the most rapid increases in developed-world borrowing costs as central banks around to world work to cool inflation. The Federal Reserve is expected next week to deliver a fourth straight three-quarter point increase in its policy rate.

In a statement explaining its decision, the Bank of Canada said officials expect the policy rate will need to rise further and tied future increases to how the economy responds to tighter financial conditions.

“Future rate increases will be influenced by our assessments of how tighter monetary policy is working to slow demand, how supply challenges are resolving, and how inflation and inflation expectations are responding,” the statement said.

The central bank’s mandate is to achieve and maintain 2% inflation through rate policy. The most recent inflation data indicate prices rose 6.9% in September from a year ago, or a slowdown from a 8.1% peak recorded in June. However, the central bank on Wednesday reiterated its earlier concerns that there has been no evidence of a meaningful decline in prices once the cost of food and energy are stripped out. The central bank expects inflation to decelerate to 3% by the end of 2023 and reach its 2% target in late 2024.

The Bank of Canada warned of sharply slower growth over the next nine months, as higher borrowing costs across the globe damp demand. Officials downgraded growth in 2022 to 3.3% from 3.5% and envisage a 0.9% expansion next year, versus its previous call for a 1.8% advance. “The slowdown in international demand is beginning to weigh on exports,” the central bank said.

It expects economic growth to stall beginning in the fourth quarter and through the first half of 2023 as the effects of higher rates spread through the economy. “Household spending on goods is slowing, and firms’ plans for investment and hiring are softening,” it said. It expects consumer spending to decline modestly and business investment growth to decelerate to 1.5% in 2023 after a projected 6.75% gain this year.

In comments this month, Mr. Macklem said the economy remained in a state of excess demand when the production of goods and services can’t keep up with demand. In its new forecast, the central bank said it anticipates an equilibrium between supply and demand in early 2023.

Economists had argued the Bank of Canada’s series of hefty rate increases would need to end soon, given the economy’s exposure to rate-sensitive sectors—most notably housing. Existing home sales have sharply dropped to prepandemic levels, and house prices have declined by just under 10% after a 50% surge between the start of the Covid-19 pandemic and the first of six Bank of Canada rate rises in early March. Housing accounted for one-fifth of Canadian economic growth in 2021.

How have China, Mexico and Greece handled inflation, and where does the U.S. fit in? WSJ’s Dion Rabouin explains.

Write to Paul Vieira at [email protected]

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