Bank of Canada raises interest rate again — but hints that hikes may be done for now

The Bank of Canada has raised its benchmark interest rate again, to 4.5 percent.

The move was widely expected by economists as the bank tries to wrestle record-high inflation into submission.

It’s the eighth time in less than a year that the bank has hiked its trend-setting rate, a move that will make borrowing money more expensive.

But at one quarter of a percentage point, it’s also the smallest hike since March, and thus a sign that the bank may be done with hiking rates for the next little while.

The bank said as much in a statement accompanying its decision, noting that “if economic developments evolve broadly in line with outlook, [the bank] expects to hold the policy rate at its current level while it assesses the impact of the cumulative interest rate increases.”

The bank also gave itself a sliver of wiggle room, however, to raise rates even more if inflation persists. “The governing council is prepared to increase the policy rate further if necessary to return inflation to the 2 percent target,” the bank said.

Mezba Mahtab owns a home in Whitby, Ont.  Much to his chagrin, he got a variable rate loan when he bought the property in 2021.
Mezba Mahtab owns a home in Whitby, Ont. Much to his chagrin, he got a variable rate loan when he bought the property in 2021. (Laura MacNaughton/CBC)

If the central bank is indeed finished hiking rates, it’s not a moment too soon for people like Mezba Mahtab. He and his wife bought a home in Whitby, Ont. in 2021. They were renters paying just shy of $2000 a month previously, but they stretched got a variable rate loan to buy more space for their children.

Their original mortgage payment was about $3,000 a month — a bit of a stretch, but workable within their family budget.

Since then, however, their monthly payment has ballooned to more than $5,000, a level that Mahtab says he gobbles up every penny he can get his hands on. “I’ve heard the term poor house before, but this is the first time I’m feeling it,” he told CBC News in an interview.

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Economist Armine Yalnizyan says the kinds of inflationary pressures that exist today make it extremely difficult for the Bank of Canada to tame inflation to about 2 percent through interest rate hikes.

He questions why the central bank keeps raising rates so aggressively, bringing pain on home owners like him while doing little to bring down the cost of living.

“I don’t believe it when they say this will control inflation, all it has done is made my bank richer,” he said.

Forecasting 3% inflation this year

The hikes so far have managed to bring inflation down from about four times the normal level to only about three times, but the central bank says it’s confident that the rate will come down sooner than many are anticipating.

According to the bank’s latest projections in the Monetary Policy Report also released Wednesday, the Bank of Canada expects the headline inflation number to come down to as low as three percent by the end of this year, and then two percent next year.

They aren’t the only ones who think so, either. Stephen Brown, an economist with Capital Economics, thinks Canada’s economy is slowing down rapidly, and inflation may be back into the range of between one and three percent sooner than many think it will.

“We continue to believe that the Bank is underestimating how quickly core prices will decline, with our forecasts still pointing to a drop in headline inflation to 2 percent by the second half of this year,” he said. “The upshot is that we remain confident that today’s hike will be the last and we see scope for the Bank to start cutting interest rates again as soon as the third quarter.”

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