Biggest one-time increase in central bank's rate since 2000
Tiff Macklem, governor of the Bank of Canada, said that higher interest rates are going to be necessary to bring down high inflation
The Bank of Canada hiked its benchmark interest rate by half a percentage point to one per cent on Wednesday in its latest move to rein in high inflation.
The bank's rate impacts Canadian businesses and consumers by influencing the rates they pay and receive on things like mortgages, GICs and savings accounts.
The bank slashed its rate to barely above zero in March of 2020 when the pandemic began.
While the move helped the economy to weather the unprecedented uncertainty of COVID-19, in recent months, inflation has come roaring back to its highest level in decades, prompting the central bank to start unwinding all that cheap credit.
"Inflation is too high," Bank of Canada governor Tiff Macklem said at a press conference announcing the news. "We need higher interest rates."
It's the second time in as many months that the bank has ratcheted its rate higher, and as such Wednesday's move is both the bank's first back-to-back rate hike since 2017, as well as its biggest single hike since the year 2000.
Economists were expecting the move, and with inflation flirting with six per cent, they expect more to come, at least until the central bank's rate gets up to two per cent — and possibly beyond.
Selling off bonds, too
The rate hike isn't the only thing the bank is doing to remove stimulus from the economy,
Previously in the pandemic, the bank began a program to buy up bonds as a way to keep money flowing and borrowing costs low. Known as "quantitative easing," the bank has been signalling for a while that the bond-buying program may be coming to an end, and on Wednesday the bank announced it is now moving in the opposite direction, getting rid of all those bonds on its books as they expire.
"Maturing Government of Canada bonds on the bank's balance sheet will no longer be replaced and, as a result, the size of the balance sheet will decline over time," the bank said.
That will add to the cost of borrowing, since the the central bank being removed as a guaranteed buyer of all those bonds will force those who issue them to have to pay a higher rate to borrow money.
Those rates were headed higher even before the bank's decision. The yield on a five-year bond topped 2.7 per cent this week, the highest rate since 2013. Barely a month ago, it was less than 1.5 per cent, and at one point earlier in the pandemic, it bottomed out at below 0.5 per cent.
The bank's decision to implement a "quantitative tightening" program will push those yields up even further, making fixed-rate mortgages more expensive.
Variable-rate loans, meanwhile, are pegged to the bank's rate, so they too will be headed higher as a result. Within hours of the central bank's decision, all five of Canada's biggest lenders — RBC, TD, Scotiabank, CIBC and BMO — had raised their prime rate by 50 points to match the central bank's rate hike.
Harder to buy
Anyone on a fixed rate loan is immune from higher rates for now because they've locked in, but anyone on a variable rate loan will feel their rate go up likely as soon as their next payment.
And those in the market for a loan face a steeper hill to climb now. One of the biggest impacts of this rate hike will be on first-time buyers, because higher rates will raise the bar for the stress test that calculates how much they are allowed to borrow.
A mortgage broker with Lowestrates.ca says that the exact amount will depend on people's situations, but in general, every 25-point move in the bank's rate results in a loss of about $12,000 of purchasing power. Wednesday's 50-point hike is twice that.
"Because of this people are going to qualify for a little less money than they used to qualify for," they said in an interview.
While home loans are the most obvious way that interest rates affect Canadians, anyone with debt is likely to feel the pinch.
Other debt more expensive, too
In Edmonton, Michelle and Candace Lister know first-hand how debt loads are usually manageable, right up until they aren't. While they both make good incomes and own their home, their stable financial life started to unravel after a car accident totalled their vehicle in 2019.
They owed more money on their written-off van than it was worth, so that debt got rolled into a new car loan in 2020.
Then they both contracted COVID-19 in 2021, which resulted in them not being able to work for a while, which caused their incomes to temporarily plummet to the point where they couldn't stay on top of the payments.
"We ended up going further and further into the credit cards, and then it was really difficult to get out," Michelle told CBC News.
The couple are currently negotiating a settlement with their creditors, but they feel compelled to share their story as a cautionary tale to others about how easy it is to drown in a high-rate environment.
"I think there's more people than one might imagine … in the same situation," Michelle said.
Rate hikes 'good and bad'
Changes to the bank rate may be bad news for borrowers but they also have a positive impact on the other side of the ledger, too. Toronto resident Paul Fotia is a retiree on a fixed income, and he says anyone trying to live off savings will welcome higher rates.
"The people that are affected negatively by it certainly outstrip the others," he told the CBC in an interview, "but hopefully it'll do what it's supposed to do with the inflation rate."
He recalls a time when something as simple as keeping money in a bank could net a saver 14 per cent or more. "Now you've got to look for places to put it and to scratch out ... a couple of percentage points."
That's part of why for consumers, rate hikes are "good and bad," according to Bruce Sellery, CEO of Credit Canada Debt Solutions.
Brace yourself: Interest rates could be headed up even faster and higher than we thought
"They are bad in that it's going to cost you more to borrow money, but they are good in that they are the action that a central bank can take to try and control inflation," he told CBC News in an interview.
Canada's inflation rate hit 5.7 per cent last month, and the price of everything from food to housing to gasoline is going up at its fastest pace in decades. "Something needs to be done so that we're not paying such ridiculous prices for things," Sellery said.
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