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Bank of Canada raises key interest rate to 5%

Canada’s central bank on Wednesday raised its key interest rate by 25 basis points to five percent, its highest level since 2001.

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 labor markets are causing persistent inflationary pressures in services.”

Inflation eased in May to 3.4 percent, a “substantial and welcome” drop from a peak of 8.1 percent 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 percent 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 percent, 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 percent through the second half of 2023 and the first half of 2024.