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Rising interest rates reflect ‘unusual’ circumstances

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The Bank of Canada raised its interest rate by one percentage point. This is the largest increase since August 1998.

This is part of a strategy to bring inflation back to its 2% target after hitting a nearly 40-year high of 7.7% in May.

Most pundits were predicting an increase of three-quarters of a percentage point. But going all the way reflected “very unusual economic circumstances,” Bank of Canada Governor Tiff Macklem said, according to The Canadian Press.

He added that not only is inflation “too high”, but consumers fear that these high numbers will continue.

“We cannot let this happen. Restoring price stability – low, stable and predictable inflation – is paramount,” Macklem said.

He acknowledged that higher rates will indeed make life more difficult for Canadians when coupled with high inflation. However, raising rates is necessary to ensure that high inflation does not become the norm, as it can cause even more pain for the economy.

The Bank of Canada noted that Canadian inflation is “largely the result of international factors,” but that “domestic demand pressures are becoming more significant.”

In the United States, inflation showed no sign of abating, with rates hitting 9.1% in June.

Rising gas, housing and food costs were the main drivers. Energy prices have risen 41.6% over the past year. The cost of food increased by 10.4%. Shelter costs increased by 5.6%.