Bank of Canada prepared to act ‘more forcefully if needed’ as it hikes rates By Reuters

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© Reuters. A sign is pictured outside the Bank of Canada building in Ottawa, Ontario, Canada, May 23, 2017. REUTERS/Chris Wattie/File Photo

By Julie Gordon and Ismail Shakil

OTTAWA (Reuters) -The Bank of Canada on Wednesday went ahead with a second consecutive half percentage point interest rate hike, as expected, and said it was prepared to act “more forcefully if needed” to bring inflation back to target.

The central bank lifted its policy rate to 1.5% from 1.0%. It also said Canada’s economy was clearly operating in excess demand and it saw inflation moving higher in the near-term, so rates would need to rise further.

“The risk of elevated inflation becoming entrenched has risen. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored,” the central bank said in the decision statement.

“Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target,” it added.

Governor Tiff Macklem has not ruled out a 75-basis-point or larger increase to tame inflation. He has also said the policy rate could go above the 2%-3% neutral range for a period, if needed.

Canada’s inflation rate edged up to 6.8% in April, a three decade high, with food and shelter prices rising at their fastest pace since the early 1980s. A recent surge in gasoline prices could help send May’s rate even higher.

While first-quarter economic growth disappointed, it was in line with the central bank’s forecast. The Bank said it continued to expect solid growth in the second quarter, buoyed by robust consumer spending and strengthening exports.

“Job vacancies are elevated, companies are reporting wide-spread labor shortages, and wage growth has been picking up and broadening across sectors,” it said.

Wednesday marked the first back-to-back 50-bp hike for the central bank since it moved to set decisions in November 2000.

The Canadian dollar was trading 0.2% higher at 1.2620 to the greenback, or 79.24 U.S. cents.

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