The Bank of Canada raised its benchmark interest rate by half a percentage point to 1% on Wednesday in its latest move to contain high inflation.
The bank interest rate affects Canadian businesses and consumers by affecting the rates they pay and receive on things like mortgages, GICs and savings accounts.
The bank cut its rate to barely above zero in March 2020 when the pandemic began.
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While the move helped the economy ride out the unprecedented uncertainty of COVID-19, in recent months inflation has returned to its highest level in decades, prompting the central bank to start unwinding all that credit. cheap.
“Inflation is too high,” Bank of Canada Governor Tiff Macklem said at a news conference announcing the news. “We need higher interest rates.”
WATCH | Bank of Canada Governor Tiff Macklem explains the need to reduce inflation:
It’s the second time in as many months the bank has raised its rate, and as such Wednesday’s move is both the bank’s first consecutive rate hike since 2017, as well as its biggest single hike. since the year 2000.
Economists expected this change, and with inflation flirting with 6%, they expect more to happen, at least until the central bank rate hits 2% – and maybe beyond.
Sell bonds too
Raising rates isn’t the only thing the bank is doing to remove stimulus from the economy,
Earlier, during the pandemic, the bank launched a bond-buying program to keep money flowing and reduce borrowing costs. Known as “quantitative easing”, the bank has been signaling for some time that the bond-buying program may be coming to an end, and on Wednesday the bank announced that it is now moving in the opposite direction, getting rid of all these obligations on its books as they expire.
“Maturing Government of Canada bonds on the bank’s balance sheet will no longer be replaced and as a result the size of the balance sheet will shrink over time,” the bank said.
This will increase the cost of borrowing, because removing the central bank as the guaranteed buyer of all these bonds will force those who issue them to have to pay a higher rate to borrow money.
These rates were on the rise even before the bank’s decision. The yield on a five-year bond rose above 2.7% this week, the highest rate since 2013. Just a month ago it was below 1.5%, and at some point earlier in the pandemic, it bottomed out below 0.5%. hundred.
The bank’s decision to implement a “quantitative tightening” program will drive these yields even higher, making fixed-rate mortgages more expensive.
Variable rate loans, on the other hand, are pegged to the bank’s rate, so they too will likely rise before the end of the day.
Harder to buy
Anyone receiving a fixed rate loan is immune higher rates for now because it has stopped, but a larger impact of this rate increase will affect first-time buyers because higher rates will raise the bar for the stress test that calculates how much they are allowed to borrow.
The mortgage broker Leah Zlatkin of Lowestrates.ca says the exact amount will depend on the situation of the people, but in general, each movement of 25 points bank rate results in a loss of about $ 12,000 in purchasing power. Wednesday’s 50 point hike is double that.
“Because of this, people are in for a little less money than before,” she said in an interview.
Changes of bank rates tend to affect the housing market in a negative way, but they also have a positive impact on the other side of the ledger for many households. That’s part of why, for consumers, rate hikes are “both good and bad,” according to Bruce Sellery, CEO of Credit Canada Debt Solutions.
“They are bad in that it will cost more to borrow money, but they are good in that they are the action that a central bank can take to try to control inflation “, he told CBC News in an interview.
The inflation rate in Canada was 5.7% last month, and the price of everything from food to housing through gasoline increases its fastest pace in decades. “Something needs to be done so that we’re not paying these ridiculous prices for things,” Sellery said.