Bank of Canada raises key interest rate to 5pc

Canada's central bank on Wednesday raised its key interest rate by 25 basis points to five per cent, its highest level since 2001, as demand continues to fuel inflation.

While the Bank of Canada acknowledged that global inflation was easing, it explained its decision -- which was in line with analyst expectations -- by saying: "Robust demand and tight labour markets are causing persistent inflationary pressures in services."

Inflation eased in May to 3.4 per cent, a "substantial and welcome" drop from a peak of 8.1 per cent in summer 2022, the bank said in a statement.

It however cautioned that "underlying price pressures appear to be more persistent than anticipated."

The bank now predicts that the government's inflation target of two per cent will only be met in mid-2025 -- six months later than previously thought.

To fight inflation, the Bank of Canada has already raised interest rates 10 times since March 2022.

Last month, it had raised the key rate by 25 basis points to 4.75 per cent, three months after being the first major central bank to pause its aggressive monetary policy.

The bank said it expected economic growth to slow, averaging about one per cent through the second half of 2023 and the first half of 2024. Growth is then expected to pick up the pace, hitting 2.4 per cent in 2025.

Canada's central bank did not offer any hints as to its approach for its next rate decision, expected on September 6, but said only that it "remains resolute in its commitment to restoring price stability for Canadians."

For now, with an unemployment rate that is up to 5.4 per cent, the labour market remains "tight," with a shortage of workers and wage growth, the bank said.

For Royce Mendes, an analyst for Desjardins, Wednesday's decision could be the "peak for rates in this cycle," noting that US inflation data indicates that "global inflationary pressures are dissipating."

"While the Bank of Canada didn't shut the door to more monetary tightening, Canadians might finally be seeing some light at the end of the rate-hiking tunnel," Mendes said.