Bank of Canada raises interest rates again, but pace of hikes may slow

Canada’s central bank continued its campaign to tackle high inflation on Wednesday, raising its benchmark interest rate by 50 basis points to 3.75%.

The Bank of Canada rate — officially known as the target overnight rate — is the amount retail banks must pay for short-term loans.

But it seeps into the economy by influencing the rates Canadians get from their own lenders on things like savings accounts and mortgages.

After cutting its lending rate to near zero at the start of the COVID-19 pandemic, the bank has raised its benchmark rate six times since March as it struggles to contain inflation, which has reached its highest level in decades.

While this decision will likely help reduce the cost of living in the long term by forcing Canadians to spend and borrow less, it will only add to the pain for consumers and businesses already suffering from inflation and rising borrowing costs.

The bank was expected to raise its rate as the country’s inflation rate is still more than twice the range it wants to see. But the 50 basis point rise is less than the 75 basis points that some economists and investors were anticipating.

WATCH | How do rate hikes affect you? :

How will this rate hike affect you?

On the streets of Toronto, Canadians told CBC News how the Bank of Canada’s decision to raise interest rates will affect their finances.

This could be a sign that the central bank is nearing the end of its rate hike cycle, but in its statement, the bank made it clear that rates “are expected to rise further.”

Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said the bank’s decision to slow the pace of its rate hikes means « we’re getting closer to the end of the hike cycle and… 75 steps basic points are now behind us”. . »

But she thinks another half a percentage point is likely to come, and « rates will need to stay at this level at least until the end of 2023 to help bring inflation back to target. »

The aim of the bank’s rate hikes is to depress demand for all sorts of goods and services which has been surging in recent months. So far, the most direct impact of the increases has been in the mortgage market, where the price to borrow money has nearly tripled since February.

Generally speaking, a 50-point hike in the bank rate, like the one announced on Wednesday, will add about $30 a month to each variable-rate loan, for every $100,000 owed. As an example, a borrower who was paying 4.25% on a standard $400,000 mortgage will see their monthly payment increase from $2,159 before to $2,270 after, which equates to $1,300 more per year – and this is in addition to the previous five rate hikes. This year.

Ahmad Syed and his wife, Hira Ahmad, recently purchased a home in Elmsdale, Nova Scotia. They were pre-approved for a variable rate mortgage in February and took possession in June, and say the speed at which the numbers have changed in six months has taken their breath away.

ahmad syed
Ahmad Syed, left, and his wife, Hira Ahmad, who recently bought a home in Nova Scotia, say they are shocked by the pace of their mortgage rate increases. (Eric Woolliscroft/CBC)

Their home loan is now costing them $1,000 more each month than they had anticipated. And while they’re keeping their heads above water for now, they’ve had to cut back on their other spending categories, cancel plans to buy a new car, and rethink travel plans.

« I don’t know how the average Canadian is going to pay their mortgage now because if it keeps going up like this it’s going to be very difficult, » Syed said.

They feel like innocent victims of the central bank’s fight against inflation. « Who is responsible for inflation in the first place? » Ahmad asked. « Why should I pay for all these mistakes? The Bank of Canada is punishing us for something we didn’t do. »

Rising rates won’t help fight food inflation

Food prices have been a major source of pain for consumers lately, with grocery store prices rising at a rate of more than 11% over the past year, according to the latest figures from Statistics Canada.

Many, including federal NDP leader Jagmeet Singh, have blamed rising food prices on corporate profits, using the term « greed » in a series of social media posts.

Derek Holt, vice president and head of financial markets economics at Scotiabank, said it’s unfair to blame high inflation solely on government or corporate actions, since food prices are soaring. more in other countries than they are in Canada. « I know food prices are high and rising and that’s causing pain, but there are important macroeconomic factors to consider that don’t make it as simple as playing the blame game and to denigrate corporations, » he said.

WATCH | An economist reacts to the latest rate hike:

Interest rate hike smaller than expected but still ‘significant’, economist says

TD Bank Chief Economist Derek Burleton reacts to the Bank of Canada’s 50 basis point interest rate hike and how high he expects it could get.

CBC News asked the central bank why Canadians should expect this rate hike to drive down food prices when previous ones offered little relief in the grocery aisle, and Deputy Principal Carolyn Rogers said the bank is watching closely how well food companies pass on the cost savings they are starting to see in their supply chain.

« Our goal of removing excess demand from the economy…will help restore competitive pressure and prevent retailers from simply passing on all costs, » she said. « [It] will bring back the competition. This will put downward pressure on prices. »

« No easy solution »

Bank officials made it clear at a press conference following the decision that they were trying to strike a balance between doing too much and too little to fight inflation. They recognized that the task will be difficult and possibly painful.

“There is no easy way to restore price stability,” Bank of Canada Governor Tiff Macklem said. « If we don’t do enough, Canadians will continue to struggle with high inflation. And they will expect persistently high inflation, which will require much higher interest rates and potentially a severe recession. to control inflation, » he said.

« Nobody wants that. »

Jimmy Jean, chief economist and strategist at Desjardins, said he expects the central bank to raise its benchmark rate again at its next policy meeting in December, but he would be surprised if there is. had more.

« Right now, with inflation having peaked, it’s…time to really hit the pause button and be really open to the possibility of having to undo some of these hikes in 2023, if inflation moderates. faster than expected or if we see a recession that is perhaps more severe than we hoped,” he told CBC News in an interview.


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