Bank of Canada Raises Interest Rates by 1 Per Cent

The Bank of Canada has increased the overnight rate by 100 basis points increasing the interest rate to 2.5 per cent.

The rate increase is the highest since 1998.

With inflation in Canada hitting 7.7 per cent – the highest since 1983, the Bank has now increased the Bank Rate to 2¾% and the deposit rate to 2½%.

The Bank of Canada said in a press release, “Inflation in Canada is higher and more persistent than the Bank expected in its April Monetary Policy Report (MPR), and will likely remain around 8% in the next few months.”

The bank says the domestic price pressures from excess demand are becoming more prominent than global factors such as the war in Ukraine and ongoing supply disruptions.

With low unemployment rates, widespread labour shortages, increasing wage pressures and strong demand, businesses are passing on higher input and labour costs by raising prices.

The Bank of Canada is estimating that GDP grew by about 4% in the second quarter and that the growth is expected to slow to about 2% in the third quarter as consumption growth moderates and housing market activity pulls back due to increasing interest rates.

The rate increase will affect mortgages, lines of credit, monetary loans and savings accounts.

If you had a variable interest rate of 2 per cent for a mortgage of $500,000 with 25 years amortization period, the rate will now be 3 per cent and the monthly payment will increase by $248.94 to $2,366.23 from $2,117.26.

Canadians should expect a further rate increase on September 7th as the bank says that interest rates will need to rise further to reduce inflation.

As per the news release, “The pace of increases will be guided by the Bank’s ongoing assessment of the economy and inflation. Quantitative tightening continues and is complementing increases in the policy interest rate. The Governing Council is resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.”

The Bank expects Canada’s economy to grow by 3½% in 2022, 1¾% in 2023, and 2½% in 2024.