The Bank of Canada has raised its benchmark interest rate by 25 basis points. This brings its key interest rate to a high of 5%, with the prime rate now at 7.2%. This is the highest level seen since April 2001. The impact of interest rate hikes can often take as long as a year to a year and a half to be realised. This has led to diverging opinions amongst economists as to whether or not another hike is to be expected following the bank’s next meeting in September.
Central Bank governor, Tiff Macklem, has said that there were expectations that inflation would ease, however, it would likely take till mid-2025 for the bank to achieve its 2% target. He confirmed that it was too early to discuss interest rate cuts and the impact that hikes have had. While some economists believe that this will be the last interest rate hike for the year, Governor Macklem has seemingly left the door open on this possibility.
This is tough news for borrowers as several major banks have confirmed that they will be matching this increase shortly. Those that have taken up variable-rate loans can expect to start paying more immediately. Those with mortgages of $500,000 with a variable rate of 5.8% can expect to start paying over $700 more annually if the rate is increased to 6.05%.
The latest hike is likely to result in the country reaching its highest cost of borrowing in 22 years. Since March 2022, the central bank has hiked its key interest rate ten times, meaning that for many variable-rate loan borrowers, their payment amounts have increased ten times since.
With many mortgage holders confirming that their payments have substantially risen in recent years, the situation has been further compounded by increased housing demand that is outstripping supply. This is resulting in housing prices continuing to rise.
A Monetary Policy Report from the Bank of Canada has noted that the poor and over-borrowed were likely to be the worst impacted by the combination of inflation and high-interest rates. However, high-interest rates were needed to help bring down inflation. Governor Macklem acknowledged that the latest hike was likely to hurt many people but was wary that the impact of the long series of hikes may suddenly kick in and put the economy in reverse.
When asked about why the last ten interest rate hikes had not had much impact on inflation, Governor Macklem pointed to the effects on housing and labour shortages, and the surge in immigration after the pandemic that had pushed the country’s population past the 40-million mark.
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