Bank of Canada surprises with a 100 basis point interest rate hike

The Bank of Canada announced yet another interest rate hike at its meeting on Wednesday, accelerating the pace even further with a 100 basis point increase to their policy rate. This increase marks the largest rate increase in more than 20 years as the bank works to rein in inflation.

The full percentage point increase came as a shock to many, as a 0.75% increase was widely expected. Previously, the bank has increased rates by just 50 basis points or less. This recent increase puts the Bank’s interest rate at a level 10 times higher than where it was at the start of the year, though rates overall remain low historically.

Speaking of history, this increase will be the largest since 1998, when the bank increased rates by almost 2%. Also historical is our level of inflation, which has not been so high in 40 years, spurring the bank to take such bold actions.

The Bank changes its policy rate in response to the country's economic needs. By changing their rate, the bank can encourage or discourage Canadians' lending and spending habits and, in turn, influence inflation.

During the pandemic, the bank kept their rates at record low levels to help the economy through the difficult times. Though the plan worked in the short term, it also caused inflation to increase rapidly, and we are now facing the consequences. Now the bank is hiking rates to discourage spending and slow the rate of inflation, though this result has yet to be seen.

The Bank admits that inflation is now “higher and more persistent than the Bank expected” in previous forecasts and that it will remain above 8% for at least the next few months. According to their report, this larger rate increase represents an attempt to “front load the path to higher interest rates.” Does this mean that we have now seen most of the rate increases that are in store? No one can say for sure, though the bank does state it intends to continue with increases, the pace of which will be determined by the Bank’s ongoing assessment of the economy and inflation.

The increase in interest rates is expected to continue having an impact on the housing market across Canada. Already many markets have seen slowing sales as buyers become warier of increasing monthly costs. Prices have also seen moderate decreases in response to the increased cost of borrowing. An increased speed of rate increases may only serve to increase these trends. Banks are expected to raise their lending rates in response to the Bank’s interest rate increase, and homeowners with variable rate mortgages will see their monthly bills rise soon.