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Bank of Canada raises rates to 1%, says more hikes needed to curb inflation and excess demand

April 13, 2022
4 mins
A young couple speak with a mortgage broker

The Bank of Canada announced its second rate hike of 2022 on Wednesday morning, when it increased the overnight interest rate to 1% — the first 50-point jump we’ve seen since 2000. This marks a consistent incline since the central bank’s last hike in March, when the Bank of Canada increased its policy rate by 25 basis points.

Although Omicron variant BA.2 is now responsible for Canada’s sixth wave, nearly all public health restrictions have eased, allowing for strong economic growth. The Bank expects the Canadian economy to grow by 4.25% this year, slow to 3.25% in 2023, and 2.25% in 2024.

However, Russia’s ongoing invasion of Ukraine, supply chain bottlenecks, and soaring inflation are still of high concern and are the main factors behind the Bank’s decision to increase rates.

Russia-Ukraine war yields ongoing setbacks for global economy

The Bank of Canada pointed to the ongoing Russian invasion of Ukraine as a main concern, prompting the central bank to propel rates forward.

“The war in Ukraine is disrupting the global recovery, just as most economies are emerging from the impact of the Omicron variant of COVID-19,” the release stated.

The conflict has also caused prices for oil and natural gas to spike and slowed global supply chains, which is creating “new economic uncertainty,” the Bank said.

“These factors are the primary drivers of a substantial upward revision to the Bank’s outlook for inflation in Canada,” stated the release. Therefore, a higher borrowing rate may provide relief to these costs and help control inflation.

Inflation expected to average nearly 6% in first half of 2022

The Bank continues to tackle rising decades-high inflation, which currently sits at 5.7% and is expected to average nearly 6% in the first half of the year.

“Inflation is being driven by rising energy and food prices and supply disruptions, in combination with strong global and domestic demand,” the Bank said in its announcement.

“There is an increasing risk that expectations of elevated inflation could become entrenched. The Bank will use its monetary policy tools to return inflation to target and keep inflation expectations well-anchored.”

Inflation is expected to lower to about 2.5% in the later half of 2023 and reach the Bank’s 2% target by 2024.

COVID-19 recovery has led to excess domestic demand

As Canada rebounds from the impacts of the COVID-19 pandemic, economic demand is moving into a state of excess, which played a part in today’s rate hike.

“Businesses increasingly report they are having difficulty meeting demand, and are able to pass on higher input costs by increasing prices,” said the release.

Though the COVID-19 virus continues to mutate, high vaccination levels have helped subdue its impact on the economy. Wage growth has also returned to pre-pandemic levels and, as a result, consumer spending has strengthened.

According to the Bank, “higher interest rates should moderate growth in domestic demand.”

What do mortgage holders make of today’s rate hike?

Because commercial banks and lenders adjust their prime rates according to the Bank of Canada’s policy rate, rising interest rates will impact variable-rate mortgage holders.

Homebuyers

While Canada’s housing market has been on fire lately, the Bank of Canada said today that activity is expected to moderate, though it’s not clear when.

If you’re currently shopping for a mortgage, locking into a fixed rate could minimize the interest incurred on your loan, at least in your early years of homeownership. Whereas taking on a variable-rate mortgage could mean signing up for a gradual increase in interest on your mortgage.

Fixed mortgage rates are the lowest we’ll likely see for a while. Getting pre-approved for your mortgage and locking in a fixed rate now could mean avoiding any projected rate hikes in the months to come.

Regardless of the type of mortgage you take out, Wednesday’s rate hike serves as a reminder to save on your fixed or variable-rate mortgage before interest rates rise further.

Homeowners

For those who currently hold a variable-rate mortgage, today’s announcement and further projected rate hikes aren’t great news. The interest rate on variable mortgages will continue to fluctuate as rates are only expected to increase in the foreseeable future.

If you’re already bearing more interest than you can manage, switching to a fixed-rate mortgage could be a good financial decision. But be sure to check with your mortgage lender to find out what the fees are for converting.

“With the economy moving into excess demand and inflation persisting well above target, the Governing Council judges that interest rates will need to rise further,” the Bank concluded in today’s statement.

The next scheduled Bank of Canada announcement is June 1, 2022.

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Michelle Bates

Editor and Writer

Michelle Bates is an editor and writer in the personal finance space. She has seven years of content writing experience.

She has a Bachelor of Arts (Honours) degree from Queen's University in English Literature and Sociology along with a Publishing - Book, Magazine and Electronic graduate certificate from Centennial College. Michelle specializes in personal finance content, including mortgages, home, auto, and travel insurance, and credit cards. Her work has been covered by notable Canadian news sources like the Financial Post, the Globe and Mail, CTV News, and Narcity.

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