OTTAWA—The Bank of Canada is trying to remove excess demand from the economy, and contrary to what some economists believe, it says it can achieve the “soft landing” of getting inflation back to its 2 percent target while avoiding an economic recession.
Canada’s central bank upped its trendsetting interest rate by 100 basis points—a full percentage point—to 2.5 percent on July 13 in a move that surprised the markets, as it was the largest one-time rate increase since 1998. A move of three-quarters of a percentage point had been widely expected after the U.S. Federal Reserve raised its federal funds target range by 75 basis points on June 15.
“The Governing Council decided to front-load the path to higher interest rates,” according to the BoC’s press release.
A key message from the central bank is that by front-loading interest rate increases now, greater pain from having to raise rates even higher down the road can be avoided.
“Front-loaded tightening cycles tend to be followed by softer landings,” Bank of Canada governor Tiff Macklem said in his opening remarks at the bank’s press conference.
Macklem explained that by targeting excess demand, which he said has really only built up “in the last number of months,” the BoC aims to give the supply side time to catch up.
“Today was more forceful,” Macklem added, saying that the “very unusual” move of 100 basis points at one time reflects the exceptional circumstances in the Canadian economy.
