Bank of Canada raises interest rate again
And probably not for the last time this year.
The Bank of Canada decided to raise the benchmark interest rate to 4.75%. This is the highest rate in more than 22 years.
In its statement, the Central Bank gives reasons for its decision. Despite the stability of the economy as a whole, price inflation for some goods has increased, and price inflation for services continues to be at a high level. Other reasons also include an increase in the real estate market and labor market tensions. The bank is still predicting that inflation will fall to 3% by the summer. However, they have no confidence that inflation will reach the 2% target without an interest rate hike.
In January, the Central Bank of Canada made it clear that it would temporarily suspend its aggressive policy of raising rates to see if enough had been done to reduce inflation. And five months later, there was another increase, which leads Canadians to believe that another key rate hike will happen in July. Economists speculate that the rate could rise to 5.25%.
Since January, the Canadian economy has shown itself to be unexpectedly stable. Economic growth was stronger than expected, and inflation declined steadily, resuming growth in April.
Even though some investors and economists admitted the probability of an increase in the key interest rate, such a decision surprised most. Most experts thought it would happen later.
The Bank of Canada's decision will hit floating-rate loan holders especially hard. Their loan payments have already gone up a lot this year. The monthly mortgage payment on a CAD 500,000 loan had risen by more than CAD 1,000 before the Central Bank of Canada's last key rate hike.
Within hours of the Central Bank's announcement, all of the country's major banks responded by raising prime lending rates to 6.95%.
