Long-term interest rate hike effects likely won’t be felt for a year: economist

The Bank of Canada’s key interest rate hike is an attempt to stymie soaring inflation, but economic experts say Canadians shouldn’t expect life to get more affordable right away.

In its largest increase since 2000, the central bank increased its target for the overnight rate by 50 basis points to one per cent Wednesday. The aim is to encourage saving and discourage borrowing and spending, which could entice businesses to slow down price increases or even bring them down.

However, Michael Devereux with the Vancouver School of Economics at UBC says it will take time for spending habits, and in turn prices, to change.

“In this sense, the motto or the quip is we have short-term pain for long-term gain, and I think the bank has taken the right path,” Devereux said, adding international factors like the war in Ukraine, supply chain issues, and price of crude also play a part.

Related articles

• Bank of Canada hikes key interest rate to 1%

• Pay raises not enough to hammer Canada’s inflation: report

• Canada’s jobless rate falls to the lowest on record in March

“Over the next year and a half, if these global shocks tend to diminish somewhat and the bank’s interest rate goes up to a more — what they would call — a ‘neutral rate.’ Then we would see a slow down in food prices, shelter, and so forth.”

Canadian inflation hit 5.7 per cent in February, the highest level in three decades. U.S. inflation for March hit a four-decade high of 8.5 per cent. Despite near-record inflation, demand for labour, goods, and services remains high.

Devereux says the higher interest rates are long overdue, however, many economists did not predict the level of inflation currently being experienced.

Canadians can likely expect even more key interest rate hikes in the near future, he says, and will likely see prices and inflation start to shift in 2023 and 2024.

However, in a global economy, nothing is certain, according to Taz Rajan with Burnaby-based bankruptcy and debt relief firm Bromwich+Smith.

“I don’t necessarily think that’s the end-all solution to bring down inflation. So yes, there’s a conversation to have at the kitchen table,” Rajan said. “It is cyclical. This too shall pass, but in the meantime, what are you going to do? It’s time for us to start taking charge of our own household economy.”

She encourages Canadians to plan a budget under the current economic circumstances, take stock of debt, and reach out to professionals if the debt and interest appears to be unmanageable.

With files from The Canadian Press