Bank of Canada hikes interest rate

By The Canadian Press and Hana Mae Nassar

The Bank of Canada has hiked its key interest rate yet again.

The rate has gone up 75 basis points to 3.25 per cent. This is the fifth consecutive increase this year.

The central bank, along with others around the world, has been raising interest rates in an effort to cool Canada’s sky-high inflation which, year-over-year, was 7.6 per cent in July, well above the Bank of Canada’s two per cent target.

“Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further,” the Bank of Canada said in its statement Wednesday.

The central bank notes that “global and Canadian economies are evolving broadly in line with” its July projection, adding COVID-19, ongoing supply issues, and the continued war in Ukraine will likely continue to “dampen growth and boost prices.”

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The rate hikes will feed into other lending rates, making it more expensive for Canadians and businesses to borrow money.

Professor Tom Davidoff with UBC’s Sauder School of Business says some people will be hit harder than others. This is especially true for those who took a gamble on buying real estate, hoping it would be their key to success, he adds.

“I think it was a reasonable belief a couple of years ago, or even a year ago, that rates looked like they were going to be low for a long time. And so, borrowing money was cheap. Well, you know, ex-post, looking back, that’s not the case. And I’m sure there are people who have remorse about having bought so many assets at high prices and at high interest rates.”

Tsur Somerville, who is also a professor at UBC’s Sauder School of Business, notes people with variable rate mortgages who are on a fixed payment schedule will also feel the pressure.

“The problem with that is that can only go up so far, so there is the potential here that, at some point, there are going to be people who are going to start seeing increases in their actual payments when they haven’t seen them up to now, even though they’re on a variable rate. That may cause some additional pain,” Somerville told CityNews.

As well as hot inflation, the rate decision comes as the Canadian economy remains in relatively good shape and the unemployment rate is at historic lows. However, economists widely expect an economic slowdown is on the horizon.

The last key interest rate hike was an increase of a full percentage point to 2.5 per cent in July. That move of 100 basis points was the largest single increase since August 1998.

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