The Bank of Canada has hiked its overnight interest rate to 4.75%, which is a 22-year high. As per Reuters, markets and analysts have predicted yet another increase next month to calm down an overheating economy and rising inflation.
Overnight interest rate is the rate at which a bank lends or borrows funds from another depository institution in the overnight market. In an overnight market, lenders agree to lend borrowers funds only "overnight" i.e. the borrower must repay the borrowed funds plus interest at the start of business the next day.
As per Reuters, the central bank of Canada had been on hold since January to assess the impact of previous hikes after raising borrowing costs eight times since March 2022 to a 15-year high of 4.50% - the fastest tightening cycle in the bank's history.
The bank in a statement had said that strong consumer spending, a rebound in demand for services, a pick-up in housing activity and a tight labor market show excess demand is more persistent than anticipated. The bank is also worried that the CPI inflation would be stuck materially above the 2% target. This after, April inflation and the three-month measures of core inflation remained high.