Canada’s central bank raised its key interest rate on Wednesday by a full percentage point to 2.5%. This is the bank’s biggest single rate hike since 1998. Bank rate affects the rate Canadians get from their lenders on things like mortgages and lines of credit. All things being equal, a central bank lowers its lending rate when it wants to stimulate the economy by encouraging people to borrow and invest. He raises 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 risen to a 40-year high. Economists had expected the bank to raise interest rates by three-quarters of a percentage point, but the full percentage increase was above those lofty expectations. And even after this record increase, more increases are expected because of how serious the specter of stubbornly high inflation is. Bank of Canada Governor Tiff Macklem said the bank made the decision to front-load the rate hike campaign because Canadians are “more concerned that high inflation is here to stay. We can’t let that happen.” “We are rapidly raising our policy rate to prevent high inflation from consolidating. Don’t expect the official inflation rate to drop to 3% until next year and not return to the 2% target until 2024. WATCHES | Prime Minister says government will help Canadians stay on top of inflation:
Trudeau reacts to Bank of Canada rate hike
After the Bank of Canada announced Wednesday that it was raising interest rates to 2.5 per cent, the bank’s biggest one-time 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 more immediately felt in the housing market, as variable rate mortgages are closely linked to the central bank rate. Canada’s housing market has been red-hot for most of the pandemic, as record low interest rates fueled demand and pushed prices to their highest levels ever. But that direction turned 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 pent-up demand. Average prices have fallen since March across the country, says the Canadian Real Estate Association. Wednesday’s rate hike will do nothing to reverse that trend. Existing owners with variable rate loans and those looking to buy will likely see their mortgage rates rise almost immediately. Tim Capes holds his son, Ben, in front of his home in Markham, Ont. He had a variable rate mortgage on the property but recently decided to switch to a fixed rate loan because he is concerned that interest rates are going to rise quickly. (Craig Chivers/CBC)
More rate hikes are expected
The increase is exactly what homeowner Tim Capes was worried about last month when he switched his mortgage from variable to fixed rate. “We felt the pain every time interest rates went up and we got a letter from the bank that our mortgage would go up by a certain amount and the budget would get a little bit tighter,” he told CBC News. . After seeing his payment rise every time the central bank raised its rate in March, April and then June, Capps decided to bite the bullet and lock in a fixed rate that costs 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 definitely picking one variable was wrong,” said the Markham, Ont., resident. “But we finally decided it was a mistake we could afford to fix. So we did.” Economists expect several more rate hikes to follow, 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.”
