BoC notches up key rate by 25 basis points

(March 4, 2003) In a bid to stem rising inflation, the Bank of Canada boosted the target for its overnight rate by 25 basis points, or one-quarter of one percentage point, to 3% this morning. Today’s decision comes in the wake of a report last week that Canada’s annual rate of inflation hit 4.5% in January, the highest level in more than 11 years.

The central bank’s move to raise its target rate for overnight loans between commercial banks is the first since last September, when it began standing pat on interest rates amid concerns over weakness both in the U.S. and global economies. The operating band for the overnight rate was also correspondingly increased today, and the Bank Rate now sits at 3.25%.

With Canada’s economy growing 3.4% last year and expected to top all Group of Seven countries this year at 3%, the central bank noted that the risk of inflation doubling its target pace outweighs the danger to the economy of a global slowdown. “The level of economic activity in Canada remains near full production capacity,” the Bank of Canada said in a statement. “In these circumstances, the persistence of above-target rates of inflation has elevated the risk of an increase in inflation expectations.”

The central bank’s preferred inflation measure, which excludes numerous volatile components such as oil, has exceeded its 2% target since February 2002, and has been above 3% for two of the past three months.

While today’s rate hike may have taken some by surprise, Bank of Canada Governor David Dodge last said in January that he planned to increase rates. The central bank is the only one among the G-7 nations to raise borrowing costs since October 2000.

The Bank of Canada’s next scheduled date for announcing the overnight rate target is April 15, 2003. The central bank’s “Monetary Policy Report” will be published on April 23, 2003.

Filed by John Craig, Advisor.ca, jcraig@advisor.ca.