By Geoffrey Smith
Investing.com -- The Bank of Canada shocked financial markets on Thursday, raising its key rate by a full percentage point as it scrambles to bring down runaway inflation.
The BoC said the target rate for overnight funds would be raised to 2.5% from 1.5%, saying it feared that inflation was set to remain higher for longer than previously expected, adding to the risk that it will become entrenched in the economy.
Economists had expected a raise of no more than 75 basis points.
The Bank's move comes only a couple of hours after another nasty upside surprise to inflation in the U.S., where the consumer price index rose 9.1% on the year through June. While Canada's inflation rate is currently lower, at 7.7%, the Bank said it expects it to stay around 8% for 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," it warned. "More than half of the components that make up the CPI are now rising by more than 5%."
The loonie, which had lost nearly a cent against the U.S. dollar on the back of the inflation news earlier, reversed its losses to trade at C$1.2991, a gain of some 0.2% on the day.