The Bank of Canada continued its campaign to tame high inflation on Wednesday by raising its benchmark interest rate by 50 basis points to 3.75 percent.
The Bank of Canada rate—officially known as the overnight target rate—is the amount retail banks charge for short-term loans.
But it filters down into the economy, affecting the interest rates Canadians get from their own lenders on things like savings accounts and mortgages.
After cutting its interest rate to near zero at the start of the COVID-19 pandemic, the bank has raised its benchmark interest rate six times since March as it struggles to contain inflation, which has hit its highest level in decades.
While the move will likely help lower the cost of living in the long run by forcing Canadians to spend and borrow less, it will only add to the pain for consumers and businesses already feeling the pain of inflation and higher costs of loans.
The bank was expected to raise its interest rate as the country’s inflation rate is still more than twice the range it wants to see. But the 50 basis point increase was less than the 75 basis points that some economists and investors had expected.
WATCH | How are rate hikes affecting you?:
How will this rate hike affect you?
On the streets of Toronto, Canadians told CBC News how the Bank of Canada’s decision to raise interest rates will affect their finances.
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 rates “will have to rise further”.
Karyne Charbonneau, executive director of economics at CIBC Capital Markets, said the bank’s decision to slow the pace of rate hikes means “we’re nearing the end of the hike cycle and … steps of 75 basis points are now behind us.”
But she thinks another half percentage point is likely to come and “rates will need to remain at this level until at least the end of 2023 to help bring inflation down to target.”
The aim of the bank’s interest rate hike is to reduce demand for all types of goods and services, which have seen a surge in recent months. The most direct impact of the increases so far has been on the mortgage market, where the cost of borrowing money has tripled since February.
Broadly speaking, a 50 basis point increase in the bank’s interest rate, such as the one announced Wednesday, would add about $30 a month to any variable-rate loan for every $100,000 owed. As an example, a borrower who was paying 4.25 percent on a standard $400,000 mortgage will see their monthly payment go from $2,159 before to $2,270 after that, which equates to an extra $1,300 a year — and that’s on top of the five previous increases on interest rates this year.
Ahmad Syed and his wife, Hira Ahmad, recently purchased a home in Elmsdale, NS. They were pre-approved for a variable rate mortgage in February and took possession in June and say the speed at which the numbers have changed in six short months has taken their breath away.
Ahmad Syed, left, and his wife Hira Ahmad, who recently bought a home in Nova Scotia, say they are shocked at the rate at which their mortgage is increasing. (Eric Uliscroft/CBC)
Their home loan is now costing them an extra $1,000 more each month than they planned for. And while they’re keeping their heads above water for now, they’ve had to cut their other spending categories to nothing, canceling plans for a new car and rethinking travel plans.
“I’m not sure how the average Canadian is going to pay off their mortgage now, because if it continues to grow like this, it’s going to be very difficult,” Syed said.
They feel like innocent victims of the central bank’s fight against inflation. “Who is responsible for inflation in the first place? Ahmad asked. “Why do I have to pay for all these mistakes? The Bank of Canada is punishing us for something we didn’t do.”
Raising interest rates will not help fight food inflation
Food prices have been a major source of pain for consumers recently, with grocery prices increasing at a rate of more than 11 per cent over the past year, according to the latest figures from Statistics Canada.
Many, including federal NDP Leader Jagmeet Singh, laid the blame for high food prices at the feet of corporate profiteering, using the term “greed” in a series of social media posts.
Derek Holt, vice president and head of capital markets economics at Scotiabank, said that argument doesn’t add up because food prices are rising much more in other countries than in Canada. “I know food prices are high and rising and that’s causing pain, but there are important macro drivers to consider that don’t make it as simple as a blame game and corporate bashing,” he said.
WATCH | An economist reacts to the latest rate hike:
Rate hike smaller than expected but still ‘significant’, economist says
Derek Burlton, chief economist at TD Bank, reacts to the Bank of Canada’s 50 basis point interest rate hike and how high he expects it could go.
CBC News asked the central bank why Canadians should expect this rate hike to bring down food prices when previous ones offered little relief at grocery stores, and senior deputy governor Carolyn Rogers said the bank is watching closely to what extent food companies will are passing on the cost savings they are starting to see in their supply chain.
“Our aim to take excess demand out of the economy … will help restore competitive pressures and prevent retailers from simply passing through all the costs,” she said. “[It] will bring back competition. That will put pressure on prices.”
“There are no easy exits”
Bank officials made clear at a news conference after the decision that they were trying to strike a balance between doing too much and too little to fight inflation. They acknowledged that the task would be difficult and possibly painful.
“There are no easy ways out to restore price stability,” Bank of Canada Governor Tiff Macklem said. “If we don’t do enough, Canadians will continue to suffer the hardships of high inflation.” And they will come to expect persistently high inflation, which will require much higher interest rates and potentially a severe recession to control inflation,” he said.
“Nobody wants that.”
Jimmy Jean, chief economist and strategist at Desjardins, said he expected the central bank to raise its benchmark rate again at its next policy meeting in December, but would be surprised if there was more beyond that.
“Right now, with inflation peaking, is … a time to really hit the pause button and really be open to the possibility that you may have to reverse some of these hikes in 2023 if inflation slows faster than expected or we are seeing a recession that is perhaps more severe than we hoped,” he said in an interview with CBC News.
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