Bank of Canada’s decision to hike its key interest rate to 4.5%, the highest level in 15 years, and to hold off on further increases for now, has sent ripples through the Canadian economy. The central bank has lifted rates at a record pace of 425 basis points in 10 months to tame inflation, which peaked at 8.1% and slowed to 6.3% in December, still more than three times the 2% target.
The bank’s decision was met with mixed reactions, with some analysts praising the move as a necessary step to curb inflation, while others criticized it as potentially harmful to the economy. “We are turning the corner on inflation,” Bank of Canada Governor Tiff Macklem said in a statement. “We are still a long way from our target, but recent developments have reinforced our confidence that inflation is coming down.”
The bank’s decision to hold off on further rate hikes for the time being is in stark contrast to the approach of the U.S. Federal Reserve, which has been ratcheting up its own target policy rate by 4.25 percentage points over the last year. The Fed is set to slow the pace of its hikes at a Jan. 31-Feb. 1 policy meeting and signal its battle against inflation is far from over.
The bank’s decision to hold off on further rate hikes for the time being has also been met with criticism by the opposition Conservative Party, who have accused Prime Minister Justin Trudeau of driving up inflation with excessive spending. Conservative leader Pierre Poilievre said the latest rate hike was a “sucker punch” from Trudeau and repeated his demands that Macklem be fired on the grounds the bank had also bungled the COVID crisis.
Despite the mixed reactions, the bank’s decision to hold off on further rate hikes for the time being is a sign that the central bank is taking a more cautious approach to tackling inflation. The bank will now take the time to assess the effectiveness of its previous rate hikes before making any further decisions. This pause in rate hikes could provide some relief to the economy, which is expected to stall and could tip into a recession during the first half of the year.