Inflation worries spark interest rate hike

(April 15, 2003) Pointing to rising inflation, the Bank of Canada today raised its key overnight lending rate by 25 basis points to 3.25%. The central bank says that since its last interest rate announcement in March, inflation has remained well above the 2% target rate and that measures of inflation expectations have edged up.

The annual inflation rate rose 4.6% in February, following a 4.5% increase the previous month.

In a statement, the bank noted that economic growth in Canada has eased slightly and that the outlook is weaker than was expected in March. Still, domestic demand remains firm and employment gains have continued, the bank added.

“With geopolitical uncertainties diminishing and world oil prices declining significantly, the risks confronting the global economy are now better balanced,” the bank said, predicting stronger economic expansion later this year and into 2004.

“The bank has been warning us forever that they were going to continue to raise rates and they were true to their word,” Doug Porter, senior economist at BMO Nesbitt Burns, told Reuters. “I think this shows how concerned the bank is about the inflation outlook.”

The big banks quickly followed the Bank of Canada’s lead, bumping prime rates up a quarter point to 5%. The central bank’s next interest rate announcement is on June 3.

Is the Bank of Canada doing the right thing in upping interest rates again? Is this a good move for Canadians or not? How will your clients react to the rate hike, if at all? Share your thoughts on this or any other industry-related topic in the “Free for All” forum of the Talvest Town Hall on Advisor.ca.

Filed by Doug Watt, Advisor.ca, dwatt@advisor.ca