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(Kitco News) After pausing for two consecutive meetings, the Bank of Canada raised its key interest rate by 25 basis points to 4.75%, the highest since 2001. The move was a surprise as market consensus calls projected for rates to remain on hold, with only a minority expecting another rate hike. Gold priced in Canadian dollars fell.
Justifying its decision to tighten monetary policy further, the central bank cited stubbornly high inflation, stronger-than-expected economic growth, and a tight labor market.
"Governing Council decided to increase the policy interest rate, reflecting our view that monetary policy was not sufficiently restrictive to bring supply and demand back into balance and return inflation sustainably to the 2% target," Canada's central bank said in a statement Wednesday. "Governing Council will continue to assess the dynamics of core inflation and the outlook for CPI inflation."
Canada's economy grew more than expected in the first quarter, with GDP at 3.1%. "Consumption growth was surprisingly strong and broad-based, even after accounting for the boost from population gains," the Bank highlighted.
Also, demand for services rebounded, spending on interest-sensitive goods rose, and housing activity picked up.
On top of that, Canada's labor market remained tight, with expanding supply of workers from higher immigration and rising participation rates getting hired quickly.
"Overall, excess demand in the economy looks to be more persistent than anticipated," the Bank of Canada said.
Inflation also continued to be problematic, with CPI ticking up to 4.4% in April, marking the first increase in 10 months.
"Concerns have increased that CPI inflation could get stuck materially above the 2% target," according to the statement. "The Bank continues to expect CPI inflation to ease to around 3% in the summer, as lower energy prices feed through and last year's large price gains fall out of the yearly data."
The BoC pointed out that other major central banks are still considering more tightening to restore price stability.
"In the United States, the economy is slowing, although consumer spending remains surprisingly resilient and the labour market is still tight. Economic growth has essentially stalled in Europe but upward pressure on core prices is persisting," the Bank said. "Growth in China is expected to slow after surging in the first quarter."
Following the announcement, gold priced in Canadian dollars fell to fresh daily lows, last trading at $2,617.44, down 0.56% on the day.
