Canada’s central bank raised its benchmark interest rate by the biggest amount in more than 20 years, sharply increasing the cost of borrowing in an effort to rein in runaway inflation.
The Bank of Canada raised its benchmark interest rate by a full percentage point to 2.5 per cent on Wednesday. This is the biggest single increase in the bank’s interest rate since 1998.
The bank’s interest rate affects the interest rate Canadians receive from their lenders on things like mortgages and lines of credit.
All things being equal, the central bank lowers the interest rate on loans when it wants to stimulate the economy by encouraging people to borrow and invest. He raises interest rates when he wants to cool an overheated economy.
After cutting interest rates to record lows at the start of the pandemic, the bank has now raised rates four times since March as part of an aggressive campaign to fight inflation, which has reached its highest level in 40 years.
Economists had expected the bank to raise interest rates by three-quarters of a percentage point, but the full percentage point increase beat even those lofty expectations. And even after this record increase, more spikes are expected because of how serious the specter of persistently high inflation is.
Bank of Canada Governor Tiff Macklem said the bank made the decision to ramp up its rate hike campaign because Canadians are “increasingly concerned that high inflation will remain. We can’t let that happen.”
“We are raising our interest rate quickly to prevent high inflation from taking hold.” If that happens, it will be more painful for the economy – and for Canadians – to reduce inflation,” he said, noting that the Bank does not expect the official inflation rate to fall to three percent by next year and not return to its two percent target by 2024.
WATCH | Prime Minister says government will help Canadians stay on top of inflation:
Trudeau reacts to the Bank of Canada rate hike
After the Bank of Canada announced Wednesday it was raising interest rates to 2.5 percent, the bank’s biggest single rate hike since 1998, Prime Minister Justin Trudeau said the government will support Canadians in these difficult times.
The housing market will feel the pinch
The impact of higher interest rates will be felt most directly on the housing market, as variable rate mortgages are closely linked to the central bank’s interest rate.
Canada’s housing market has been red-hot for most of the pandemic as record low prices have fueled demand and pushed prices to their highest levels ever. But that direction reversed in the first half of this year as the central bank’s signal that higher interest rates were coming took the wind out of the sails of voracious demand.
Average prices have fallen since March across the country, the Canadian Real Estate Association says. Wednesday’s rate hike will do nothing to reverse that trend.
Existing owners of variable rate loans and those looking to buy are likely to see mortgage rates rise almost immediately.
Tim Capes holds his young son Ben outside his home in Markham, Ontario. He had an adjustable-rate mortgage on the property, but recently decided to switch to a fixed-rate loan because he was worried interest rates would rise quickly. (Craig Cheevers/CBC)
More rate hikes are expected
The increase is exactly what homeowner Tim Capes was worried about last month when he switched his home loan from a variable rate to a fixed term.
“We felt the pain every time interest rates went up and we got a letter from the bank saying our mortgage would go up by a certain amount and the budget would get a little tighter,” he said in an interview with CBC News.
After seeing his payment grow each time the central bank raised its interest rate in March, April and then June, Capes decided to bite the bullet and lock in a fixed rate that cost him about $700 more per payment than he was paying before , but at least it comes with the certainty that it won’t change for the next five years.
“I definitely wish I had done it earlier when the rates were even lower because it was definitely a mistake to choose a variable in the first place,” said the Markham, Ont., resident. “But in the end we decided it was a mistake we could afford to fix.” So we did.”
Economists expect several more rate hikes, as do Capes.
“As these rate hikes start happening, it’s a lot easier to know that my mortgage isn’t going up with every rate hike.”
Add Comment