Wednesday-June 7, 2023 In a surprise move, the Bank of Canada announced today that it has decided to raise its benchmark interest rate to 4.75 percent. This decision marks the first rate hike since January, when the central bank signaled a pause in its aggressive campaign of rate increases. The unexpected move comes as the Canadian economy has shown unexpected resilience and inflation rates have ticked higher in recent months.
The central bank’s decision to increase the rate from 4.5 percent to 4.75 percent takes it to the highest level since 2001. While investors and economists had speculated about a potential rate hike, the timing of this increase caught many by surprise, as the consensus view was that the bank would likely wait until later in the year to raise rates.
Key Highlights
- Bank of Canada raises benchmark rate to 4.75% on June 7.
- Resilient Canadian economy spurs the unexpected rate hike.
- More rate hikes anticipated; swaps priced in at least one more increase by year-end.
- Variable rate mortgage holders face increased costs; payments on $500,000 mortgage rose by over $1,000.
- Economist questions effectiveness of rate hike, warns of potential recession.
Following the announcement, there is growing speculation among observers that more rate hikes are on the horizon. Trading in investments known as swaps has already factored in at least one more hike by the end of the year, with the possibility of additional increases to 5.25 percent or beyond.
The rate hikes implemented by the Bank of Canada have significant implications for variable rate mortgage holders. Many of them have already experienced skyrocketing mortgage payments this year. In fact, the previously announced rate hikes have already added over $1,000 to the monthly payment on a $500,000 mortgage. Now, with the central bank’s latest increase, variable rate mortgage holders can expect further financial strain.
Shortly after the central bank’s decision, Canada’s major banks swiftly followed suit and raised their prime lending rates to 6.95 percent, aligning with the Bank of Canada’s hike.
However, not everyone is convinced that this move is beneficial. Economist Armine Yalnizyan, the Atkinson Fellow on the Future of Workers, questions the rationale behind the rate hike. Yalnizyan argues that it will primarily hurt vulnerable Canadians without addressing the underlying inflation issues, and might even exacerbate them. She highlights that the single biggest driver of the recent inflation increase was the rise in mortgage interest costs, which are ultimately set by the bank itself.
Yalnizyan’s concerns underscore a broader debate regarding central banks’ approaches to taming inflation. She argues that raising interest rates may not necessarily be the most effective solution, particularly in the face of unprecedented economic circumstances. Yalnizyan contends that central banks worldwide are falling into the trap of relying on traditional methods without considering alternative approaches that could be more suitable for the current economic landscape.
Despite the varying opinions, market observers anticipate that the Bank of Canada is far from finished with its rate hikes. Economists predict another 25-basis-point increase in July, which would bring the policy rate up to five percent. The central bank’s concern over consumer insolvencies and elevated debt levels further strengthens the case for more rate hikes.
As the Bank of Canada takes decisive action to address inflation and support economic stability, Canadians brace themselves for the potential consequences. The impact of these rate hikes will undoubtedly be felt across various sectors, particularly by variable rate mortgage holders. While the long-term effectiveness of these measures remains uncertain, the central bank is determined to address inflation concerns and steer the economy towards stability.
