Bank of Canada Governor Tiff Macklem Announces “Very Unusual” Rate Hike to Curb Inflation and Restore Economic Order

Bank of Canada

Governor of the Bank of Canada Tiff Macklem, seen here during a press conference last month, announced an interest rate increase of 100 basis points today, the largest one-day jump since 1998. Photo: Patrick Doyle/The Canadian Press

Signalling its concern over the ever-increasing price of food and gas, the Bank of Canada announced that it is raising interest rates to 2.5 per cent.

Today’s increase of 100 basis points — from 1.5 per cent to 2.5 per cent — represented the largest one-day jump since 1998 and raised worries that turbulent economic storms may lie ahead.

“An increase of this magnitude in one meeting is very unusual,” said Bank of Canada Governor Tiff Macklem in a press conference today in Ottawa following the announcement. “It reflects very unusual economic circumstances.”

Macklem cited three conditions that made the bank’s aggressive rate-hike strategy a necessity:

  • Curbing inflation:  “Elevated inflation was proving more persistent,” said Macklem, adding that, restoring “price stability was paramount.”
  • Restoring economic balance: “The Canadian economy is overheating,” noted Macklem, suggesting that a rate hike would slow the economy so that “supply can catch up with demand.”
  • Avoiding economic pain down the road: “The goal is to get inflation back to its two-per-cent target,” said Macklem. The trick is to make this happen without harming the economy too badly or causing a painful recession.

With food and energy costs increasingly putting the pinch on household budgets (the Consumer Price Index shows inflation running around eight per cent, its highest level since the early ’80s), Macklem felt that the bank had to act quickly and aggressively.

According to Bank of Canada forecasts, inflation should fall from its current eight per cent in the third quarter of 2022 to three per cent by the end of 2023.

Higher borrowing costs are obviously bad news for those paying down debts, whether it’s a mortgage, home equity line of credit or car loan. It will mean that the cost of servicing this debt will increase, putting even more pressure on already strained household budgets.

The rising rates, however, are good news for conservative investors — those who prefer to put their money in safer fixed-income investments, shielding their reserves from the often volatile stock market. Investment vehicles like bonds, GICs and annuities have become somewhat forgotten in the era of low-interest rates. If interest rates keep rising, these products could once again see a resurgence, as they offer better returns at less risk.

The Bank of Canada’s next interest rate announcement will be on Sept. 7.