The Bank of Canada has increased the overnight rate by 25 basis points increasing the target rate to 0.5 per cent.
With the January inflation rate running at 5.1% which is well above the Bank’s target range, the Bank of Canada says the invasion of Ukraine together with poor harvests and higher transportation costs will push inflation to be higher in the near term than projected in January.
The Bank said, “The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty. Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth. Financial market volatility has increased.”
The central bank said it will use its monetary policy tools to return inflation to the 2% target and keep inflation expectations well-anchored.
Bank of Canada says Canada’s economic growth in the fourth quarter at 6.7% was stronger than the Bank’s projection.
The Bank thinks that economic slack has been absorbed and states in the press release, “Both exports and imports have picked up, consistent with solid global demand. In January, the recovery in Canada’s labour market suffered a setback due to the Omicron variant, with temporary layoffs in service sectors and elevated employee absenteeism. However, the rebound from Omicron now appears to be well in train: household spending is proving resilient and should strengthen further with the lifting of public health restrictions. Housing market activity is more elevated, adding further pressure to house prices. “
The Bank rate will increase to 0.75 per cent and the deposit rate to 0.5 percent.
Today’s hike is the first time since the Bank of Canada increased rates in October 2018.
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, the rate will now be 2.25 per cent and the bi-weekly payment will increase by $28.02 to $1,004.88 from $976.86.
The Bank of Canada has scheduled the next rate decision for April 13th. It will also publish its full outlook for the Canadian economy and inflation, including risks to the projection at that time.