1 of 2 | After standing pat for months, the central bank of Canada announced Wednesday it was hiking its overnight lending rate by 25 basis points. Photo courtesy of the Bank of Canada
June 7 (UPI) -- The Central Bank of Canada hiked its lending rates after a five-month pause, saying Wednesday that its policies have yet to bring supply and demand back into balance.
The central bank put its overnight lending rate at 4.75% after announcing a 25-basis-point increase.
"The 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," it said.
The bank said the Canadian economy performed better than expected during the first quarter, with a 3.1% expansion for gross domestic product. Demand levels were considered more persistent than anticipated.
Consumer-level inflation, meanwhile, jumped to 4.4% in April, the first increase in 10 months. Lower energy prices since April could help cool inflationary pressures in the Canadian economy.
But so-called core inflation, which strips out volatile energy and food prices, remains elevated enough for the central bank to express concern that levels could "get stuck" above its target rate.
The bank said Wednesday it would continue to asses the situation moving forward.
"In particular, we will be evaluating whether the evolution of excess demand, inflation expectations, wage growth and corporate pricing behavior are consistent with achieving the inflation target," it said.
A research note from James Knightly and Francesco Pesole at investment bank ING said surprise rate hike sets the tone for further action when the bank meets again in July.
"There was little in the way of forward guidance other than to say it will continue to evaluate inflation, wage and demand dynamics," they wrote. "Nonetheless, having restarted hiking after a five-month period the odds certainly favor at least one additional move."
The Canadian economy was already feeling some strains before the surprise rate hike, however. The government said last month that its citizens had the highest levels of household debt among the Group of Seven countries.
About three quarters of all household debt in Canada is attributed to housing mortgages, making the country particularly vulnerable to any future global economic crisis, according to the report by the Canada Mortgage and Housing Corporation.
Should the central bank hike rates further as expected, it would only add to the debt burden by way of higher mortgage rates.