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Bank of Canada raises benchmark interest rate for the first time since 2018

·3 min read
Bank of Canada Governor Tiff Macklem speaks during a news conference after the rate decision and release of updated Monetary Policy Report in Ottawa, Ontario, Canada October 27, 2021.  REUTERS/Blair Gable
Bank of Canada Governor Tiff Macklem speaks during a news conference (REUTERS/Blair Gable)

The Bank of Canada raised its target for the overnight rate to 0.50 per cent.

The 25 bps hike to contain inflation is the first since 2018, after cutting to help cushion the pandemic’s economic blow in 2020.

Canada's central bank says more rate hikes are coming but says it is following the situation in Ukraine closely. “The unprovoked invasion of Ukraine by Russia is a major new source of uncertainty,” said the Bank of Canada in a release.

“Prices for oil and other commodities have risen sharply. This will add to inflation around the world, and negative impacts on confidence and new supply disruptions could weigh on global growth.”

Inflation here for longer

The Bank of Canada says price increases overall have become more pervasive.

"All told, inflation is now expected to be higher in the near term than projected in January," said the Bank of Canada.

"Persistently elevated inflation is increasing the risk that longer-run inflation expectations could drift upwards."

Canadian inflation hit levels not seen since 1991, up 5.1 per cent year over year.

"With the CPI likely to run hotter than we had expected through the first half of the year, odds are that the Bank will deliver the remaining three-quarter point hikes we had allocated for 2022 over the next three rate-setting dates, rather than spread out through the year," said Avery Shenfeld, chief economist at CIBC World Markets.

"We expect it to then pause at a 1.25% overnight rate to take stock of the direction for growth and inflation, and to let quantitative tightening operate as a tool for adjusting policy, before resuming rate hikes in 2023."

Rebounding from Omicron

Meanwhile, here at home fourth-quarter GDP growth came in at an annualized rate of 6.7 per cent.

“This is stronger than the Bank’s projection and confirms its view that economic slack has been absorbed.”

The Bank of Canada says it will continue in the reinvestment phase of its government of Canada bonds while keeping holdings roughly constant.

When to begin winding down the balance sheet or quantitative tightening will be guided by the Bank's ongoing assessment of the economy and meeting its inflation target.

Higher mortgage rates

The Bank of Canada says housing market activity is elevated, adding to pressure on prices. Rock-bottom interest rates have helped nudge buyers into real estate. But that's about to change, depending on the type of mortgage.

"For those worried about the impact on their wallets, this overnight interest rate increase will mean no immediate change for those with a fixed-rate mortgage. Even so, fixed rates are going up, which could present an issue at renewal time for those that locked in at a fixed rate of under two per cent in 2020 or 2021," said Leah Zlatkin, mortgage broker and LowestRates.ca expert.

"Today's variable rates are still very low, and it will take multiple increases to push variable rates up enough to make them comparable to today's fixed rates."

Also See: The latest real estate news for housing prices, mortgage rates, markets, luxury properties and more at Yahoo Finance Canada.

LowestRates.ca crunched the numbers using its mortgage calculator and found a $720,000 home with 10 per cent down over 25 years paid around $2,587 a month on a 1.2 per cent variable mortgage.

The same mortgage with a 25 bps increase would be around $2,664, which is $77 more a month or $924 a year.

Monthly mortgage payments on the same home with a five-year fixed rate of 2.59 per cent would be around $3,033.

Jessy Bains is a senior reporter at Yahoo Finance Canada. Follow him on Twitter @jessysbains.

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