By Julie Gordon and David Ljunggren
OTTAWA (Reuters) – The Bank of Canada hiked interest rates for the first time since October 2018 on Wednesday and said rates would need to go higher despite increased uncertainty following Russia’s invasion of Ukraine.
The central bank raised rates by 25 basis points to 0.50%, as expected, and also said it would continue with the reinvestment phase of its bond buying program. Rates had been at a record low 0.25% since March 2020.
“The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty,” the bank said in its rate decision statement. “Prices for oil and other commodities have risen sharply. This will add to inflation around the world.”
It added that new supply disruptions could weigh on global growth, noting the situation remained fluid.
The situation in Ukraine is putting more pressure on already hot inflation, the bank said, adding it now expects price increases to be higher in the near term than in its January forecast.
“Price increases have become more pervasive, and measures of core inflation have all risen,” it said. “Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards.”
Inflation surged to a 30-year high at 5.1% in January, its 10th consecutive month above the Bank of Canada’s 1%-to-3% control range.
The Bank of Canada also said Canada’s rebound from the Omicron variant was “well in train,” and that first-quarter growth now looked more solid than previously projected.
“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.
(Reporting by Julie Gordon in Ottawa; editing by Jonathan Oatis)
