OTTAWA, April 13 (Reuters) – The Bank of Canada on Wednesday raised interest rates by half a percentage point – its biggest step in more than two decades – and promised further hikes to fight the surge in inflation which is partly caused by the war. in Ukraine.

The central bank raised its overnight rate from 0.5% to 1%. He also said he would allow the government bonds she accumulated during the COVID-19 pandemic to disappear as they mature from April 25, initiating what is known as a squeeze. quantitative.

Both moves were in line with analysts’ expectations. The Bank of Canada last hiked 50 basis points (bps) in May 2000. In remarks after the announcement, Governor Tiff Macklem said further rate hikes would be needed.

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“We are committed to using our key interest rate to bring inflation back on target and we will do so forcefully if necessary,” Macklem said. The Bank said there was “a growing risk” that inflation expectations “could take root”.

The Canadian dollar was trading up 0.4% at 1.2595 for the greenback, or 79.40 US cents, recovering from its weakest level in nearly four weeks earlier in the session.

“Given the daunting task ahead in terms of fighting inflation…some very aggressive actions were warranted,” said Doug Porter, chief economist at BMO Capital Markets. “It certainly looks like there’s a solid possibility that (the Bank) will follow up with another 50 basis point hike in June.”

Macklem noted that despite Wednesday’s hike, rates were still well below the neutral rate, which the bank calculates between 2% and 3%.

“If demand responds quickly to higher rates and inflationary pressures moderate, it may be appropriate to pause our tightening,” Macklem said. “On the other hand, we may need to pull rates slightly above neutral for a period to bring supply and demand back to equilibrium and inflation to target.”

The Reserve Bank of New Zealand also raised rates by 50 basis points to 1.50% on Wednesday, and the US Federal Reserve is expected to make two consecutive half-point interest rate hikes in May and June as central banks seek to fight inflation. .

On Wednesday, the Bank of Canada raised its inflation forecast for the first half of the year to just under 6% from the 5% forecast in January.

He also raised the forecast for 2022 to 5.3% from 4.2%, blaming Russia’s invasion of Ukraine for adding to global commodity prices, energy costs and disruptions. of the supply chain.

Inflation hit a 30-year high of 5.7% in February, its 11th consecutive month above the Bank of Canada’s 1-3% range. Last month, the Bank raised rates for the first time in three years, taking them to 0.5% from a record low of 0.25%. Read more

On Wednesday, he also updated the growth outlook, saying the economy would grow at a torrid 6% annualized rate in the second quarter, double the pace in the first, driven by consumer spending.

“A wide range of measures suggest that the economic slowdown has been absorbed and the economy is beginning to operate beyond its productive capacity,” the April monetary policy report said.

The next interest rate announcement will be on June 1.

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Additional reporting by Julie Gordon in Ottawa and Fergal Smith in Toronto; Editing by David Gregorio and Andrea Ricci

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