The Bank of Canada has bumped its key interest rate to five per cent, up 25 basis points.

Officials said Wednesday that underlying inflationary pressures are proving “more stubborn” than first expected.

“We’ve come a long way, and we don’t want to squander the progress we’ve made,” Governor Tiff Macklem said during a news conference.

“We need to stay the course to restore price stability for Canadians.”

Macklem said their efforts to return inflation to the two per cent target are showing signs of working.

The consumer price index fell to 3.4 per cent in May, down from a peak of 8.1 per cent last summer.

But Macklem said much of that was due to lower energy prices and base-year effects as last year’s large price increases fall out of inflation.

“We are still seeing large price increases in a wide range of goods and services,” he said.

The governor noted that growth has remained “surprisingly strong” in Canada and the economy remains in excess demand.

While spending on many goods that are typically sensitive to interest rates has slowed, Macklem said it has not slowed by as much as they expected.

Several factors appear to be supporting household spending, he said, including a tight labour market and rapid population growth.

“Newcomers to Canada are entering the labour force, easing the labour shortage. But at the same time, they add to consumer spending and demand for housing,” said Macklem.

Macklem said many households also accumulated savings since the start of the COVID-19 pandemic, and those savings may be acting as a buffer and supporting consumer spending.

The central bank said it continues to expect economic growth to moderate and inflation to ease — but at a slower pace than first anticipated.

Macklem said they expect economic growth to average about one per cent through the second half of this year and the first half of next year.

“This means the economy moves into modest excess supply in early 2024, and this should relieve price pressures,” he said.

CPI inflation is forecast to remain at about three per cent for the next year before declining gradually to the two per cent target in mid-2025 — about six months later than expected in April.

Macklem said there are concerns that the progress toward the two per cent target could stall, and inflation could even rise again.

“If new information suggests we need to do more, we are prepared to increase our policy rate further. But we don’t want to do more than we have to,” he said.

You can view Macklem’s full remarks by clicking here.

PM responds to interest rate hike

The prime minister was asked about the interest rate hike during a meeting of NATO in Lithuania.

Justin Trudeau said the increase is not something any Canadian wanted to hear.

“The cost of living is a real challenge everywhere around the world with record-high inflation, with interest rates continuing to go up,” said Trudeau. “People around the world are facing significant challenges.”

Trudeau said his government is providing support to those who need it the most.

He noted the so-called “grocery rebate” that went out to more than 11 million Canadians last week.

“Canadians in provinces where the federal pricing backstop applies will be receiving their climate cheque this week,” said Trudeau.