Bank of Canada hikes key interest rate to 1%

The central bank increased its target for the overnight rate to one per cent in an attempt to cope with soaring inflation.

The 50 basis point rise is the most significant increase the central bank has made in two decades.

The Bank of Canada also announced it is ending reinvestment and will begin quantitative tightening.

“Russia’s ongoing invasion of Ukraine is causing unimaginable human suffering and new economic uncertainty. Price spikes in oil, natural gas and other commodities are adding to inflation around the world. Supply disruptions resulting from the war are also exacerbating ongoing supply constraints and weighing on activity,” the bank said in a release Wednesday.

Last month the central bank raised its rate a quarter point to half of one per cent, the first hike since 2018.

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This comes after we’ve seen home prices shoot up by exceptional levels since the onset of the pandemic.

The Greater Vancouver Real Estate Board reports prices are up more than 20 percent year-over-year.

The BC Real Estate Association had expected a significant move from the central bank, as housing continues to be out of reach for many Canadians.  BCREA Chief Economist Brendon Ogmundson says it won’t be an immediate change, however, and it may take months until the market would really start to see the effects.

Read more: Average GTA home price surpasses $1.3M, up 28% from last year

Greater Toronto Area prospective homebuyers have also seen the average home price jump, by nearly 28 per cent, compared to 2021.

Low supply continues to be blamed for the market, which has seen bidding wars and buying frenzy become the norm in recent years.

Canadians are also facing higher prices at grocery stores, gas stations and more, due to rising inflation. Statistics Canada says consumer prices have surged, reaching the highest levels since August 1991.

“CPI inflation in Canada is 5.7%, above the Bank’s forecast in its January Monetary Policy Report (MPR). Inflation is being driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand,” the bank said Wednesday, adding “CPI inflation is now expected to average almost 6% in the first half of 2022 and remain well above the control range throughout this year. It is then expected to ease to about 2½% in the second half of 2023.”

‘More dangerous game’: Economist warns people using home as ‘piggy bank’

Bryan Yu, chief economist with Central 1, says people with revolving lines of credit will have higher costs and may have to reallocate some of their budgets. He adds people should consider the expectation of further rate hikes when they look at how much debt they carry.

“I think that in the past couple of years, during the pandemic, we’ve seen a period of very low interest rates … and that has also reflected in prime rates. So the levels that people are borrowing at have been very low,” he said.

He says for people who are looking at their home as a “piggy bank” to draw funds from, “it’s a little bit more of a dangerous game.”

“If you’re using it for discretionary spending, that is probably not the best way to use it, you probably wanted to do some investing with it or potentially reinvest in your home, for example. So, some individual may feel some some challenges from the hikes. We also recognize though, during the pandemic, a lot of people had significantly more savings during this period as well.”

Yu says across Canada, there’s about $3 billion of excess savings in the economy, much of which belongs to higher-income households.

“Many are likely to be homeowners, as well. That means there is some cushioning, in terms of whether these hikes are going to be have a significant impact on household budgets.”

With files from The Canadian Press