Closing summary
The Bank of Canada has just raised interest rates by 100 basis points, more than expected, to 2.5%, citing “higher and more persistent” inflation than anticipated.
Higher gasoline and food prices have pushed US inflation to a new 40-year high of 9.1%. The data cemented expectations of a 75 basis point rate hike from the Federal Reserve at the end of this month, and more aggressive rate hikes further out.
European shares sold off on the news, oil prices fell with Brent crude heading below $100 a barrel, and the dollar index jumped to a 20-year high. Stocks on Wall Street are also down.
The euro briefly dropped below parity against the dollar for the first time in almost two decades. At 1.45pm BST, it was changing hands at $0.998, down 0.4% on the day, its lowest level since December 2002. It is now trading a $1.0017, down 0.2% on the day. Sterling is trading at its lowest levels since March 2020, down 0.2% at $1.1863.
The single currency has lost more than 10% so far this year, battered by fears over recession and Europe’s energy crisis because of Russia’s invasion of Ukraine
The UK economy grew by by 0.5% in May, rather than showing no change as expected, fuelled by a holiday boom and a big rise in GP appointments. But economists warn that this strength could be short lived amid the cost of living crisis, and the think tank NIESR said it was ‘touch and go’ as to whether the economy entered recession in the second quarter. Here is our analysis of the data.
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Bank of Canada hikes rates by 100bps
The Bank of Canada has raised interest rates by 100 basis points to 2.5% – while markets had been expecting a small hike of 75bps. The central bank said in a statement:
Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report, and will likely remain around 8% in the next few months. While global factors such as the war in Ukraine and ongoing supply disruptions have been the biggest drivers, domestic price pressures from excess demand are becoming more prominent. More than half of the components that make up the CPI are now rising by more than 5%.
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