Australian Economy

Canada has raised interest rates by 1 percentage point. Could Australia follow?

The Bank of Canada’s (BoC) shock decision to raise interest rates by 1 percentage point has taken global markets and Canadian borrowers by surprise and ramped up expectations more central banks will follow with super-sized hikes.

The BoC lifted its policy rate from 1.5 per cent to 2.5 per cent, the highest it has been since 2008, in a bid to arrest inflation.

It is far from alone in rapidly raising interest rates. Today, the Philippines central bank raised rates by 0.75 of a percentage point to 3.25 per cent in an unscheduled move, while Singapore’s authorities also tightened monetary policy in a surprise move this morning.

Yesterday it was the Bank of Korea and Reserve Bank of New Zealand both raising rates by half a percentage point, in the latter’s case for the third meeting in a row.

The aggressive but uncoordinated action by central banks worries former IMF chief economist Maurice Obstfeld, who says there is a real risk that they take rates too high while trying to fight inflation.

IMF chief economist Maury Obstfeld at the World Economic Outlook press conference in Washington, DC.
Maurice Obstfeld was the chief economist at the International Monetary Fund between 2015 and 2018.(Supplied: IMF)

“You’ve got a real cocktail of global monetary contraction that could go a bit too far because each central bank is looking only at its own domestic situation and not thinking about the global effects,” he warned.

Canada was the first G7 country to make such an aggressive rate hike in this economic cycle, but bets are rising that the US Federal Reserve will follow after inflation came in much higher than anticipated, at 9.1 per cent for the year to June.

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