The Bank of Canada raises its rate again to 3.75%

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 slashing its lending rate to near zero at the start of the pandemic, the bank has raised its benchmark rate six times since March as it struggles to rein in inflation, which has hit an all-time high. level for 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?

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 further rate hikes are really on the table and rates « will still have to increase ».

CIBC economist Karyne Charbonneau says the bank’s decision to ease its rate of hike means « we are nearing the end of the bull run and…75 basis point lows 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. For 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 rates. hikes this year.

Owners Ahmad Syed and his wife Hira Ahmad recently purchased a home in Elmsdale, Nova Scotia. They were pre-approved for an adjustable rate mortgage in February and took possession in June, and they say the speed at which the numbers have changed in just six months has left them breathless.

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, » he said.

They are part of a chorus of voices calling on the Bank of Canada to pause on rate hikes. « Who is responsible for inflation in the first place? » Ahmad asks. « Why should I pay for all these mistakes? The Bank of Canada is punishing us for something we didn’t do. »

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. »