The Bank of Canada on Wednesday raised its benchmark interest rate to 1.5% and indicated further gains.
The central bank’s decision to raise its rate by half a percentage point was widely expected as it acted to aggressively curb high inflation.
Inflation reached 6.8 percent in April, more than double the level the central bank likes to see.
In the vacuum, central banks are lowering interest rates to encourage debt and investment to stimulate a slow economy, and raising rates when they want to cool an overheated economy.
Like many other countries, Canada reduced lending rates in the early days of the COVID-19 pandemic. But these lower interest rates have contributed to rising inflation, which is causing the central bank to change direction.
Although the cost of living is already at its highest rate in 30 years, the central bank says it still does not believe things have peaked, saying in a statement on Wednesday that inflation “will probably rise even more in the short term. time before you start.
The rise puts the bank’s rate at a quarter of a point of the 1.75 percent level it was at before the pandemic, and the bank made it clear in its statement that several more rate hikes are expected.
“With … inflation persisting well above target and expected to rise in the short term, the [bank] it continues to judge that interest rates will have to rise further, “the central bank said in a statement.
The bank’s decision will increase borrowing rates for floating rate loans, such as mortgages and other lines of credit.
John Marsh, the owner of Elecompack Systems Inc., an office supply store in Oakville, Ontario, has variable-rate loans tied to his business and says higher interest rates are starting to bite. (Craig Chivers / CBC)
This will affect 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 erupted, Marsh said, he saw his sales plummet by about 40 percent, so like many business owners, he borrowed money to stay afloat to weather the storm. . While he’s happy that his business is making a profit again, this week’s rate hike will stretch his budget even further.
“I have several variable rate loans, and every time the rate changes it affects us,” he told CBC News in an interview.
Marsh estimates Wednesday’s 50-point rise will likely increase its debt payments by a few hundred dollars a month. “It will be at least six years before we fully recover,” he said. “Anything that makes recovery difficult right now is not a good thing.”
Impact on the housing market
While consumers and businesses with floating rate debt will feel the highest rates, the biggest impact is likely to be on the Canadian real estate market.
Cheap lending rates drove an impressive rise in Canada’s real estate market during the pandemic, but it looks like the wind is blowing out of its sails recently as the central bank indicates that the era of cheap money is coming to an end.
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The national average house price has fallen for two consecutive months and is expected to continue to fall. While this is obviously worrying for sellers and potentially good news for buyers, Toronto mortgage broker Samantha Brookes said absolutely everyone will be affected by this week’s rate hike, regardless of the party. of the market where they are located.
While lower prices may help buyers, many are finding that their mortgage will cost more than they expected, he told CBC News in an interview.
“These low rates are gone, they’re totally off the table,” said Brookes, CEO of Mortgages of Canada, “and people just need to be more aware of how much this will increase their cost per month. “
Similarly, homeowners who had opted for the rescue of a king by selling their home should adjust their expectations downwards, but even those who do not plan to sell feel the pinch.
Toronto mortgage broker Samantha Brookes, CEO of Mortgages of Canada, says both buyers and sellers will be affected by this week’s rising interest rates. (Craig Chivers / CBC)
Brookes gives the example of homeowners who bought years ago when one or two percent mortgage rates were easy to find. Today, these homeowners’ mortgages are pending “renewal” and interest rates are in the four percent range. [so] they can no longer pay the mortgage, “he said.
These homeowners are forced to stretch their mortgages for a longer period of time to reduce their monthly payment 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 we started taking those rates to where they were before,” he said.