Rate increase to 1.5% and warning of further hikes from Bank of Canada. How will it affect you?

On Wednesday, the Bank of Canada raised its key lending rate by 0.50% for the second time in a row and warned that it could act “more forcefully” in case it’s necessary for taming inflation.

The decision to push the overnight rate to 1.5% was delivered in quite a hawkish statement focused on worries about price pressures intensifying and becoming long-term.

Although a half per cent rise was widely expected, the statement’s tone will cause speculation that Governor Tiff Macklem is thinking about a faster pace of tightening. The BoC “is ready to act more forcefully in case it’s necessary to fulfil its commitment to achieve the 2% inflation target,” the central bank noted. “The risk of elevated inflation becoming longer-term has risen,” – it said, pointing that it would use all the proper tools to get inflation back to the target level.

While markets were already predicting one more 0.50% rate hike at the July 13 meeting, now bets rose sharply for a fourth half per cent increase in September and the terminal rate exceeding 3%.

According to certain analysts, a 0.75% hike is also possible, although the BoC hasn’t supported this forecast until now.

“To me ‘more forcefully’ means faster than 0.50%,” – Derek Holt from Bank of Nova Scotia says. “That could be the reason they deleted ‘timing’ from the last sentence and only mentioned the ‘pace’.”

Large consecutive increases are unprecedented since the Bank of Canada started adjusting monetary policy in 2000. They are supposed to be a strong response to the faster-than-expected inflation seen in the country.

The BoC also didn’t express concerns over a sharp correction in the real estate market, which could be seen as hawkish. According to the officials, the market is “moderating”, but only from “exceptionally” high levels of activity. They added that consumer spending is still strong.

The central bank’s next rate meeting is scheduled for July 13, 2022.

With today’s rate decision Prime rate is also going up by 0.50% to 3.70%. Prime is widely used by big banks as the rate setter for variable mortgages, home equity credit lines and various credit products. For the average variable mortgage holder today’s rate hike means higher payment starting next month. For every $100,000 of the outstanding mortgage balance, you will pay approximately $24 more per month.


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