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The Bank of Canada raised its benchmark interest rate to 1.5 per cent on Wednesday and signalled that more hikes are on the way.
The decision by the central bank to raise its rate by half a percentage point was widely expected as it moves to aggressively rein in high inflation.
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Inflation hit 6.8 per cent in April, more than twice the level that the central bank likes to see.
In a vacuum, central banks slash interest rates to encourage borrowing and investing to stimulate a sluggish economy, and they raise rates when they want to cool down an overheated economy.
Just as many other countries did, Canada reduced lending rates in the early days of the COVID-19 pandemic. But those record-low borrowing rates have contributed to rising inflation, which is what’s prompting the central bank to change direction.
While the cost of living is already at its highest rate in 30 years, the central bank says it doesn’t think things have peaked just yet, saying in a statement on Wednesday that inflation “will likely move even higher in the near term before beginning to ease.”
The hike brings the bank’s rate within a quarter of a point of the 1.75 per cent 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 move higher in the near term, the [bank] continues to judge that interest rates will need 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.
That’s going to impact people like John Marsh, the owner and operator of Elecompack Systems Inc., an office supply store and label maker based in Oakville, Ont.
When the pandemic hit, Marsh said, he saw his sales plunge by about 40 per cent, so like many business owners, he borrowed some money to stay afloat to ride out the storm. While he’s pleased his business is now turning a profit again, this week’s rate hike will stretch his budget even further.
“I have several loans with a variable rate, and every time the rate changes, it has an impact on us,” he told CBC News in an interview.
Marsh estimates that Wednesday’s 50-point hike will probably raise his debt payments by a few hundred dollars a month. “It’s going to be at least six years before we recover fully,” he said. “Anything right now that makes it harder to recover is not a good thing.”
Impact on housing market
While consumers and businesses with variable rate debt will feel the higher rates, the biggest impact will likely be on Canada’s housing market.
Cheap lending rates fuelled a breathtaking rise in Canada’s housing market during the pandemic, but the wind appears to be coming out of its sails of late as the central bank signals the era of cheap money is coming to an end.
Personal finance expert Kelley Keehn says the Bank of Canada’s decision to raise interest rates will make life even more expensive in the short term, so it’s time to start paying down debt.
The national average house price has fallen for two months in a row and is expected to fall further. While that’s obviously concerning for sellers and potentially good news for buyers, Toronto mortgage broker Samantha Brookes said absolutely everyone will be impacted by this week’s rate hike, no matter what part of the market they are in.
While lower prices may help buyers, many are finding that their mortgage will cost more than they expected, she told CBC News in an interview.
“These low rates are now gone, they’re totally off the table,” Brookes, the CEO of Mortgages of Canada, said, “and people just have to be more aware of how much this is going to increase their cost per month.”
Similarly, owners who had banked on a king’s ransom when selling their home are having to adjust their expectations downward, but even those with no plans to sell are feeling the pinch.
Brookes gives the example of owners who bought years ago when mortgage rates of one or two per cent were easy to find. Today, those owners’ mortgages are up for renewal, “and the interest rates are in the four per cent range, [so] they can no longer afford the mortgage,” she said.
Those owners are finding themselves having to stretch their mortgages over a longer time period to bring the monthly payment down to something they can afford. While the process of adjusting to higher rates will be painful, Brookes said it will be good for everyone in the long run.
“It’s time for us to start bringing those rates back to where they used to be,” she said.
Have questions about this story? We’re answering as many as we can in the comments.
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