Bank of Canada hikes key interest rate to 0.5%
More small rate hikes expected as central bank tries to rein
in inflation
The Bank of Canada raised its benchmark interest rate to 0.5 per cent on Wednesday, a move that's expected to be the first of a series of small rate hikes this year in an attempt to tame inflation that has risen to its highest point in decades.
It's the first time the bank has raised its rate since 2018. Before the pandemic, the bank's rate was 1.75 per cent, before it quickly slashed the rate down to 0.25 per cent to help the economy.
The Bank of Canada's rate affects the rates that Canadian consumers get on things like mortgages, lines of credit and savings accounts at their own banks.
While the bank has been telegraphing its plans to raise its rate to fight inflation for a while now, the bank acknowledged in its announcement Wednesday that inflation is heating up even faster than anticipated.
The bank cited news this week that Canada's economy grew at a 6.7 per cent annual pace in the last quarter of 2021, a figure that the bank described as "very strong."
"This is stronger than the Bank's projection and confirms its view that economic slack has been absorbed."
The bank also cited factors beyond Canada's borders as reasons for its move.
"Economies are emerging from the impact of the Omicron variant of [coronavirus] more quickly than expected," the bank said.
Investors think there could be as many as five more small rate hikes before the year 2022 is out. Adam Brown with BDO Canada told CBC News in an interview that there's "no need to panic" but Wednesday's move clearly shows that rates are finally going to start inching higher.
"Clearly there's more rate increases, and there's potential [for them] to be faster than we expected," he said.
Lenders are already starting to move in reaction to the central bank's hike. Royal Bank is raising its prime lending rate to 2.7 per cent, starting tomorrow, up from 2.45 per cent. The other big banks are expected to follow suit.
The cost of those hikes could add up fast. Right now, a qualified buyer looking to buy a $500,000 home with a $400,000 mortgage could easily get a 25-year variable loan at about one per cent. That would cost them $1,507 a month right now.
If the central bank raises its rate five times and that buyer's lender matches the hikes, their monthly payment would jump to $1,842 a month — almost $300 more every month.
War in Ukraine a factor
The Bank of Canada cited the ongoing invasion of Ukraine as yet another factor that could influence inflation, or other parts of Canada's economy.
Among other things, Russia's unprovoked attack on its neighbour has caused the price of commodities like fertilizer, natural gas and oil to skyrocket, as the country is a major producer of these items.
Canada is one of many countries that have pledged to no longer import oil from Russia, but one of the impacts of that move is to cause the price to spike. The price of the North American crude oil benchmark known as West Texas Intermediate topped $111 a barrel on Wednesday, its highest price in eight years.
That drives up the price for energy that all Canadian consumers and businesses need, which will further contribute to inflation.
"The invasion of Ukraine is putting further upward pressure on prices for both energy and food-related commodities," the bank said. "All told, inflation is now expected to be higher in the near term than projected in January."
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