Bank of Canada raises benchmark interest rate to 1.5%, signals further hikes underway
The Bank of Canada raised its benchmark interest rate to 1.5% on Wednesday and signaled that further hikes are on the way.
The central bank’s decision to raise its rate by half a percentage point was widely expected as it strives to aggressively rein in high inflation.
Inflation hit 6.8% in April, more than double the level the central bank likes to see.
In a vacuum, central banks cut interest rates to encourage borrowing and investment to stimulate a sluggish economy, and they raise rates when they want to cool an overheated economy.
Just like many other countries have done, Canada cut its lending rates at the start of the COVID-19 pandemic. But these historically low borrowing rates have contributed to rising inflation, prompting the central bank to change direction.
With the cost of living already at a 30-year high, the central bank says it doesn’t think things have peaked just yet, saying in a statement Wednesday that inflation ” will probably increase further in the short term before it starts”. to facilitate.”
The hike brings the bank’s rate back to within a quarter of a point of the 1.75% level it was at before the pandemic, and the bank made it clear in its statement that several more rate increases are planned.
“With … inflation persisting well above target and expected to pick up in the near term, the [bank] continues to judge that interest rates will have to rise further,” the central bank said in a statement.
The bank’s decision will increase borrowing rates for variable rate loans such as mortgages and other lines of credit.
This will impact people like John Marsh, owner and operator of Elecompack Systems Inc., an office supply store and label maker based in Oakville, Ontario.
When the pandemic hit, Marsh said, he saw his sales drop about 40%, so like many business owners, he borrowed money to stay afloat and ride out the storm. While he’s happy that his company is making a profit again, this week’s rate hike will further stretch his budget.
“I have several variable rate loans, and every time the rate changes it impacts us,” he told CBC News in an interview.
Marsh estimates that Wednesday’s 50-point rise will likely increase its debt repayment by a few hundred dollars a month. “It’s going to be at least six years before we fully recover,” he said. “Anything that makes recovery more difficult is not a good thing.”
Impact on the housing market
While consumers and businesses with variable rate debt will feel the higher rates, the biggest impact will likely be on the Canadian housing market.
Cheap lending rates have fueled a stunning rise in the Canadian housing market during the pandemic, but the wind seems to be blowing out of its sails lately as the central bank signals that the era of cheap money is coming to an end .
The national average house price has fallen for two consecutive months and is expected to decline further. While this is obviously concerning for sellers and potentially good news for buyers, Toronto mortgage broker Samantha Brookes said everyone will be affected by this week’s rate hike, regardless of part of the market in which they are located.
While lower prices may help buyers, many are finding their mortgage will cost more than expected, she told CBC News in an interview.
“Those low rates are now gone, they’re totally irrelevant,” said Brookes, CEO of Mortgages Canada, “and people just need to be more aware of how much it’s going to increase their cost per month.”
Likewise, homeowners who had banked on a royal ransom when selling their home must adjust their expectations downward, but even those who have no intention of selling are feeling the pinch.
Brookes gives the example of homeowners who bought years ago when mortgage rates of one or two percent were readily available. Today, these homeowners’ mortgages have to be renewed, “and the interest rates are around 4%, [so] they can’t pay the mortgage anymore,” she said.
These homeowners need to stretch their mortgages over a longer period to bring the monthly payment down to a level they can afford. Although the process of adjusting to higher rates is painful, Brookes said it would be good for everyone in the long run.
“It’s time for us to start bringing those rates back to where they were,” she said.