The Bank of Canada just raised its policy interest rate
It's a hike, according to the Bank of Canada today.
After a series of holds over the past year, the central bank told Canadians it would be raising its policy interest rate to 2.50%.
"It was Bank of Canada Governor Macklem's remarks a couple of weeks ago that likely tipped the scales towards today's decision to hike. The Bank of Canada said it does not see a clear offramp to the conflict in the Middle East and is increasingly worried about the risks to inflation. That’s being reflected in its updated inflation forecasts," said TD Economist Marc Ercolao.
"In a world of higher oil prices, the BoC is hiking from a risk management perspective to ensure inflation remains on target in the months ahead."
"The Canadian economy can likely handle this modest hike of 25 basis points, but the economy is also still facing some headwinds. These include ongoing trade uncertainty with the United States and a labour market that, while broadly recovering, is still seeing limited employment growth. Canada's economy is also facing tighter conditions from rising global bond yields," Ercolao continued.
In its announcement, the BoC said, "Against this backdrop, Governing Council decided to increase the policy rate to reduce the risk that continuing high energy prices spread broadly to the prices of other goods and services. There could be a need to increase the policy rate further, but given uncertainties, Governing Council agreed to proceed carefully. The Bank remains committed to maintaining Canadians’ confidence in price stability."
Could there be more rate hikes on the way?
It's likely, but the BoC will be careful not to overdo it, Ercolao said.
One more hike would take the policy rate to 2.75%, in the middle of the BoC’s neutral range, and provide some added insurance against persistent energy-driven inflation. Beyond that, the BoC is likely to take a more cautious approach given the risk of overtightening into a recovering economy.
What does a Bank of Canada interest rate mean for Canadians?
If you have a variable rate mortgage, you might find yourself paying close attention to the BoC's interest rate announcements.
Financial institutions use the BoC's policy interest rate as a benchmark against which to set interest rates on their lending products, such as loans and mortgages.
When the BoC announces a cut, it can become cheaper to borrow money. When the BoC hikes its rates, it can become more expensive.
If you have a variable rate mortgage, or another type of variable rate loan, you could see your interest rate fluctuate should the BoC cut or hike its rates.
If you have a fixed rate mortgage, your interest rate is locked in for the duration of your mortgage term, so the BoC's interest rate announcements would not influence your loan’s current fixed interest rate.
