The Bank of Canada raised its key interest rate by half a percentage point to one percent on Wednesday in its latest move to contain high inflation.
The bank’s interest rate affects Canadian business and consumers by affecting the interest it pays and receives on things like mortgages, GICs and savings accounts.
The bank cut its interest rate just above zero in March 2020, when the pandemic began.
While this move helped the economy overcome the unprecedented uncertainty of COVID-19, inflation has returned to its highest level in decades in recent months, prompting the central bank to start lending all these cheap loans.
“Inflation is too high,” Bank of Canada Governor Typh McLem told a news conference. “We need higher interest rates.”
This is the second time in so many months that the bank has raised its interest rates higher, and as such, Wednesday’s move is both the first consecutive increase in interest rates since 2017 and the largest one-time increase since 2000.
Economists expected this move, and with inflation flirting at six percent, they expect more, at least until the central bank’s rate reaches two percent – and probably more.
Bond sale too
Raising interest rates is not the only thing the bank is doing to remove incentives from the economy,
Earlier, during the pandemic, the bank launched a bond-buying program as a way to keep cash flow and borrowing costs low. 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 said it was now moving in the opposite direction, getting rid of all those bonds in its books. when they expire.
“Canada’s government bonds in the bank’s balance sheet will no longer be replaced and as a result the amount of the balance sheet will decrease over time,” the bank said.
This will increase the cost of the loan, as the abolition of the central bank as a guaranteed buyer of all these bonds will force those who issue them to have to pay a higher rate to borrow money.
These interest rates were higher even before the bank’s decision. The yield on a five-year bond exceeded 2.7% this week, the highest rate since 2013. Only a month ago it was below 1.5%, and at one point earlier in the pandemic reached a bottom below 0.5 per cent
The bank’s decision to implement a “quantitative tightening” program will increase these incomes even more, making fixed-rate mortgages more expensive.
Meanwhile, floating rate loans are tied to the bank’s interest rate, so they will also be targeted more likely before the end of the day.
Add Comment