Bank of Canada has raised key interest rate by 0.5 per cent, first half-point hike in over two decades

Bank of Canada has raised key interest rate by 0.5 per cent, first half-point hike in over two decades

The Bank of Canada is raising its key interest rate by the highest amount in more than 20 years in the face of rising inflation.

The central bank is increasing its policy rate by half a percentage point to one per cent and warning that rates will need to rise further, it said, while also raising its expectations for the inflation rate.

It is also easing pandemic-era stimulus measures by beginning so-called quantitative tightening later this month, when the government bonds it holds will no longer be replaced when they mature.

In making its interest rate decision, the Bank of Canada says the spike in energy and other commodity prices in the wake of Russia’s invasion of Ukraine are driving inflation higher than its earlier expectations.

It now says the annual inflation rate will average almost six per cent in the first half of this year compared with its January forecast of close to five per cent.

According to those in the industry the interest rate increases are already causing a shift in the red hot real estate market.

“People are definitely taking a step back and thinking twice about the situation rather than jumping in with two feet like were just a month ago,” said Victoria mortgage broker Andrew Wade.

Wade says his phone was ringing off the hook Wednesday after the central bank increased its rate with people nervous about what to do with large loans and variable mortgages.

“A lot of the time I’m just calming people down because this half a point interest basically equates to a $24 increase for every $100,000 mortgage that they have so it’s not a massive jump,” Wade said.

While more increases are expected this year, Wade says he still believes a variable mortgage is the best option because the interest rate is still lower than a fixed rate and there are fewer penalties.

“At the end of the day I think that we’re going to see interest rates go up but it’s not going to be a huge change because it’s a drastic effect to the economy.”

And one economist says there should be an end in sight to the rising inflation and rising interest rates.

“They’re looking at inflation to be about 2.5 per cent by mid 2023 sort of a steady decline from where it is now,” said University of Victoria economic professor Graham Voss. “Assuming things don’t get worse in Europe, the pandemic doesn’t come back in some way, or China doesn’t find more difficulties with COVID and shut down parts of its economy.”



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