iCanada – In an unexpected move on Wednesday, the Bank of Canada announced a hike in its benchmark interest rate to 4.75 percent, catching investors and economists off guard. This decision marks the first increase in the trend-setting interest rate since January, when the central bank signaled a temporary pause in its aggressive rate hike campaign to assess the impact on inflation. However, recent data depicting an unexpectedly resilient Canadian economy and a surprise uptick in inflation have prompted the bank to revise its stance.
The latest interest rate increase brings the Bank of Canada’s benchmark to its highest level since 2001, leaving many wondering if there are more hikes to come. Financial markets have already factored in at least one additional rate hike by the end of the year, with some speculating that further increases may push the rate beyond 5.25 percent.
This decision has significant implications for variable rate mortgage holders, who have already experienced a surge in their monthly payments this year. The rate hikes announced prior to Wednesday’s increase have added over $1,000 to the monthly payment on a $500,000 mortgage. In a swift response, major Canadian banks swiftly matched the central bank’s hike by raising their prime lending rates to 6.95 percent, compounding the financial burden on borrowers.
However, concerns have arisen regarding the bank’s decision to raise rates. Armine Yalnizyan, an economist and Atkinson Fellow of the Future of Workers, questions the effectiveness of this move and its potential negative impact on vulnerable Canadians. Yalnizyan emphasizes that the largest driver of the recent inflation rate increase was mortgage interest costs, which rose by 28 percent in the past year. She argues that the bank’s rate hikes exacerbate the challenges faced by the housing market, affecting individuals across the income spectrum.
The impact of higher mortgage costs extends beyond homeowners to the rental market. Property investor Tanzim Nasir, based in Edmonton, reveals that the series of rate hikes has left some investment properties cash-flow negative. Nasir has been forced to increase rents in order to manage the escalating costs, putting pressure on tenants who are already struggling with affordability.
While the Bank of Canada‘s decision has stirred debate among economists, Brian Yu from Central 1 Credit Union questions the necessity of further rate hikes. Yu argues that it usually takes a minimum of 18 months for the full effects of rate increases to manifest, leading to skepticism about why the bank felt compelled to act after such a short period of inaction. He suggests exercising more patience and closely monitoring the evolving economic data before considering additional hikes.
Despite the differing opinions, the consensus among experts is that the Bank of Canada is not yet finished with its tightening cycle. Royce Mendes, an economist with Desjardins, anticipates another 25-basis-point rate hike in July, pushing the policy rate up to five percent. Stephen Brown from Capital Economics shares a similar view, predicting another rate hike before the bank’s summer break, citing the need for continued progress toward restoring price stability.
As speculation mounts regarding future rate hikes and their impact on the economy, uncertainty is starting to seep into the housing market. Reports suggest that some individuals, fearful of a potential market crash, have begun selling their houses at discounted prices, fueling concerns of a market downturn.
Only time will reveal the full ramifications of the Bank of Canada’s surprising rate hike decision. Market participants and Canadians alike are keeping a watchful eye on economic indicators, eagerly awaiting further clarity on the central bank’s future monetary policy actions.
Rising Bank of Canada Interest Rate – Read More
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