Bank of Canada hikes rate to 2.5%, biggest jump since 1998

The Bank of Canada raised its key interest rate by a full percentage point on Wednesday, marking the largest single rate hike since August 1998.

The central bank’s decision signalled a more aggressive approach to bringing skyrocketing inflation, which hit a 39-year-high of 7.7 per cent in May, back down to its target of two per cent.

In its latest monetary policy report, the Bank of Canada said inflation in Canada is “largely the result of international factors,” but that “domestic demand pressures are becoming more prominent.”

Most realtors had forecasted a rate hike of three-quarters of a percentage point.

Mayur Arora, a realtor with One Flat Fee, said that while the rate announcement may have come as a surprise, it isn’t unreasonable given the rate of inflation, rising inflation expectations and the tight labour market.

Mayur Arora-Realtor, One Flat Fee Real Estate.

"The increase of 100 basis points or 1% in the interest rate is quite significant for buyers who are looking to get into the market at this time. If you are a seller, now would be the best time to sell before the next rate hike puts a downward pressure on prices. If you are a buyer then this is a great time as the prices have already come down a bit and the sellers will be more open to giving you better terms and conditions. If you are an investor and looking at pre-sales then then you can now find never seen before incentives from developers. Finding a property with a longer completion might be the best option for a buyer at this time because that mitigates any future risks attached with the inevtiable market volatility. Keep in mind that during the 2008 worldwide recession, Canada faired better than all other developed countries in the world. I predict, that because of Canada’s strong geo-economic fundamentals and with the massive influx of immigrants, it will be the least affected and that in due course the housing market will rebound again soon"-Mayur Arora- One Flat Fee Real Estate

After raising interest rates by half a percentage point in June, Bank of Canada governor Tiff Macklem said the central bank “may need to move more quickly” to bring inflation down.

The rate hike Wednesday brings the Bank of Canada’s target for the overnight rate to 2.5 per cent and is expected to prompt the commercial banks to raise their prime rates which will increase the cost of loans linked to the benchmark such as variable rate mortgages and home equity lines of credit.

In a note, Puneet Agrawal-Aventis Capital Inc said this will be quite the financial hit for those with floating mortgages. 

Puneet Agrawal-Aventis Capital Inc 

On the mortgage side of things, "In simple terms, the current increase means that Canadians with fixed rate mortgages will largely stay unaffected by this increase but the ones with floating rate (Prime linked) rates will see an increase in their mortgage payments. Going forward, we may see some more rate hikes but smaller ones if the inflation rate starts does not slow down but based on the trends being forecasted, we should start seeing a slowdown in speed with the latest interest rate hike"-Puneet Agrawal, Aventis Capital Inc.  

The central bank said the largest drivers of global inflation are the Russian invasion of Ukraine and ongoing supply disruptions, leading to higher global energy and food prices.

Inflation in the U.S. soared to a new four-decade peak in June. Consumer prices rose 9.1 per cent compared with a year earlier, the government said on Wednesday.

Statistics Canada is expected to release Canada’s inflation data for June onJuly 20.

Domestically, the Bank of Canada said “further excess demand has built up,” citing tight labour markets and strong demand.

That excess demand is allowing businesses to pass more of their cost increases on to consumers, the bank said.

The unemployment rate fell to a record-low of 4.9 per cent in June as businesses continue to struggle with an ongoing labour shortage.

The central bank is also citing concerns about rising inflation expectations among consumers and businesses. Economists generally worry when people begin expecting high inflation, as those expectations then feed into future prices set by business and wage negotiations.

“The bank is guarding against the risk that high inflation becomes entrenched because if it does, restoring price stability will require even higher interest rates, leading to a weaker economy,” said the central bank.

In its forecast, the Bank of Canada expects GDP growth to begin to slow this year, growing by 1.75 per cent in 2023 and 2.5 per cent in 2024.

It’s also forecasting inflation will remain at eight per cent over the next few months and begin to decline toward the end of the year and reach its target rate in 2024.

The central bank’s projections assume that globally, oil prices will gradually decrease, and supply chain disruptions will ease.

“The governing council continues to judge that interest rates will need to rise further,” the Bank of Canada said in its decision, adding that the pace of these rate hikes will depend on the central bank’s assessment of the economy and inflation.

Macklem, who recently recovered from COVID-19, will hold a video news conference on Wednesday morning.